IntroductionLow multiples such as earnings multiples or book multiples generally represent good values. While this may not be always true, it is true enough that they make for a great screen to shortlist stocks for further review. In this screen we go after the traditional trifecta of low price/book, low price/earnings and low price/sales. At… [Read More]
Best Mid Cap Stocks to Buy for Value
What is a Mid Cap Stock?
Mid cap value stocks are often overlooked as investors gravitate towards large stocks or are focused on small cap stocks. Mid capitalization companies are well settled and can provide steady returns and often great dividends. Find the balance between excellent liquidity and profit potential in undervalued mid cap stocks. Our mid cap stocks have market caps between $800 million and $13 billion
See also: what is net book value
Where small cap is typically home to fast growing just out of the gate companies, mid cap segment of the market features mostly companies that have carved out their own niche in a competitive market. We are very likely to see many different competitors jostling for market share. Consumers are not likely to be loyal to any one company, although in some sectors we may have the market divided up between very few players.
For many sectors, the market size is often just large enough to support a few mid capitalization stocks. There are limits to how large these companies can grow, but there are also ways for many of these companies to find new growth markets and grow their revenues and earnings. In most cases, the mid cap companies may still be focused on one product or service. To grow, they may now look to add more services and products or enter new markets altogether.
Some mid cap companies will eventually grow out of this designation by adding new products or acquiring other businesses. They may start to build economies of scale and scope that helps create a competitive advantage and protect their market position. This is often called the moat.
Most of the remaining mid cap companies will stay mid cap or even shrink or die out.
Most value investors find happy hunting grounds among the small cap stocks. Larger value investors such as Warren Buffett, can no longer play in the small cap asset class and they move on to large cap stocks as they find the moat can be more reliable there. Mid cap stocks tend to slip out of value investors' radar, but this is unfortunate.
Mid Cap Companies are in Transition: Special Situations and Corporate Reorganization are Rampant
Take for example Seth Klarman of Baupost Fund.
Widely regarded as one of the best value investors of all time, Klarman often sticks to the mid cap stocks and distressed assets where the situation is complex enough to deter casual investors while there is still not enough attention from the Wall Street.
Special situations investing can be very profitable although it is also a very hands on investing process. After all, who has time to make rounds of the bankruptcy courts, or negotiate terms with the management and other debt holders!
This is because you are likely to find mid cap companies in transition. And where there is change, there are scared investors and possible undervaluation
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