Mid-Cap Stocks Leading Market by Wide Margin
Quietly, mid-cap stocks have outperformed their bigger and smaller peers this year.
The Standard & Poor’s mid-cap 400 index is up 11.7% so far in 2000, versus 5.9% for the S&P; small-cap 600 and a decline of 0.1% for the long-dominant big-cap S&P; 500.
The mid-cap index hit a record high on Friday, though it eased 1.1% to 496.55 on Monday.
It’s not just a few stellar tech stocks fueling the mid-cap sector’s latest rally: While the index has gotten a lift over the last month from communications equipment and biotech stocks, industry groups such as banks, agricultural products and water utilities have been among the top gainers.
One reason for the strength among medium-capitalization companies, mutual fund managers say, has been that more investors have recently noticed the disparities in stock valuations between pricey large-cap shares and less-expensive mid-cap issues.
“There was an attitude for a long time that you couldn’t go wrong with a Cisco Systems, a Microsoft, an Intel,” said Jim Oberweis Jr., manager of the Oberweis Mid-Cap Fund (phone: [800] 323-6166), which is up 17.9% this year. “As earnings growth begins to slow for those companies, people ask, ‘Where is the next alternative?’ Mid-caps are it, so we’re seeing valuations creep up.”
Oberweis and other mid-cap managers say their asset class, loosely defined as stocks with market capitalizations (stock price times number of shares outstanding) between $1 billion and $5 billion (though some managers go as high as $8 billion), offers the juicy earnings growth potential of small-cap stocks but with more trading liquidity and less volatility.
As Christopher K. McHugh, manager of Turner Midcap Growth ([800] 224-6312), put it, “At $1 billion or $2 billion in market value, a company has pretty much grown through the risk that smaller start-ups have to deal with. These companies are really positioned to perhaps become the next big thing. Though some will stumble and fall back into micro-cap level, others will become another America Online, Yahoo or Charles Schwab. That’s what you’re always looking for.”
McHugh, whose fund has returned 9.4% this year, likes the chances of two mid-cap stocks that have been chopped in half from their February highs as turbulence rocked Nasdaq: CheckFree Holdings Corp. (ticker symbol: CKFR) and RealNetworks Inc. (RNWK).
Norcross, Ga.-based CheckFree, whose software and services facilitate online bill-paying, is well positioned in a business that could explode in the next few years, McHugh said, noting its alliances with AOL and Yahoo.
“I know I myself am trying to do it [pay bills online], and so are a lot of other people as the Internet grows,” he said. Though CheckFree faces competition from major banks, the company got a head start and “has proven it can execute,” he added.
Seattle-based RealNetworks, whose software enables downloading of audio and video content, might also be poised for a breakthrough, Oberweis said.
“The streaming video market could take off in the next year or so. Advertisers can hardly wait for it to happen. This company is well positioned and it’s profitable.”
RealNetworks earned 5 cents a share in this year’s first quarter and is expected to earn 18 cents a share this year.
Oberweis also said he likes the “proprietary products and dramatic potential” of Digital Lightwave Inc. (DIGL), Cytyc Corp. (CYTC) and Andrx Corp. (ADRX).
Clearwater, Fla.-based Digital Lightwave, whose products manage and monitor fiber-optic telecom networks, has seen its sales grow rapidly. Its stock, though well off its March peak, is up 36% this year after a nice pop Monday when the company announced a $3.7-million contract from Lucent Technologies Inc.
“The ability to transfer bandwidth is a very exciting area, vitally important in the coming years,” Oberweis said.
Boxborough, Mass.-based Cytyc, whose stock has rocketed 80% this year and remains near its high, captured 20% of the Pap smear market last year with its new product used for detection of cervical cancer.
“They’ve gotten a phenomenal vote of confidence from the health plans even though their product is more expensive,” Oberweis said.
Shares of Fort Lauderdale, Fla.-based Andrx, which develops drug-delivery systems as well as generic and “generic-plus,” or modified, drugs, have almost tripled in 2000. Oberweis said the Food and Drug Administration recently approved its generic version of the blockbuster heartburn drug Prilosec.
In the mutual fund arena, mid-cap funds are mirroring the success of major mid-cap indexes. The average mid-cap growth fund, for example, was up 7.3% year-to-date through Friday, versus 2.5% for the average small-cap growth fund and 2.3% for the average big-cap growth fund, according to fund-tracker Morningstar Inc.
The average mid-cap value fund was up 5.8% through Friday, versus 5.5% for small-cap value funds and 2.9% for large-cap value funds.
(For index-oriented investors, there are at least two exchange-traded funds that track the S&P; 400. Their ticker symbols: MDY and IJH. See related story, C1.)
Chicago-based Morningstar FundInvestor newsletter recently recommended five mid-cap value funds. The funds may be attractive to investors who believe there is still a relative lack of bargains among big-cap stocks but who also are wary of small-cap value stocks because of their poor liquidity.
Morningstar’s picks:
* Weitz Value ([800] 232-4161), up 0.9% this year: Manager Wally Weitz’s style “requires patience because he likes to buy companies when they’re beaten up,” wrote analyst Justin Craib-Cox. “His stock picks and sector plays have generally been spot on, though.”
* Oakmark Select I ([800] 625-6275), up 13.2%: “Manager Bill Nygren runs a lean portfolio with only a handful of stocks. The fund’s concentration does add risk.”
* Tweedy Browne American Value ([800] 432-4789), down 0.3%: This fund, which can buy stocks in any capitalization range, “ventures overseas with greater frequency than most mid-value funds, so it could play a lot of roles in a portfolio.”
* Van Kampen Comstock ([800] 421-5666), up 6.2%: “It has been less volatile than the typical mid-value fund over the long haul. One caveat: Frequent turnover makes this fund a questionable fit for a taxable account.”
* T. Rowe Price Mid-Cap Value ([800] 638-5660), up 5.2%: This “plain vanilla” fund has produced steady performance, “and it comes from a shop that keeps expenses low and has deep resources.”
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What’s Hot in Mid-Cap
Here are the stock industry group sectors within the S&P; mid-cap 400 index that had the biggest percentage gains in the 30 days ended Monday.
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Uniform rental: +18.7%
Banks: +15. 7
Book publishing: +15.4
Agricultural products: +14.1
Misc. financial: +12.2
Communications equip.: +11.6
Biotechnology: +8.8
Health services: +7.3
Water utilities: +7.2
Commercial services: +5.8
Mid-cap index: +2.3
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Source: Bloomberg News
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Mid-Cap Sector Shines This Year
The Standard & Poor’s index of 400 mid-size stocks is the star among S&P;’s broad-based share indexes year-to-date. Percentage change in the key S&P; indexes since Dec. 31:
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Utilities: +14.7%
Mid-cap 400: +11.7
Financials: +9.8
Small-cap 600: +5.9
Big-cap 500: -0.1
Biggest-cap 100: -0.3
Industrials: -2.0
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Source: Bloomberg News
