Mid-cap stocks could hit the sweet spot next year for investors looking for quality at an attractive price. Mid-cap stocks, which are loosely defined as companies with market capitalizations between $2 billion and $10 billion, are often considered the overlooked middle child in the asset class universe, squeezed between their large-cap and small-cap peers. Lately, however, they've been outperforming.
The SPDR S & P Midcap 400 ETF Trust (MDY) and the iShares Core S & P Mid-Cap ETF (IJH) rallied 7.5% this quarter, better than the S & P 500's 5.6% gain, though weaker than the Russell 2000's 8% advance. In November, the mid-cap S & P 400 notched its best month of the year.
"Our fundamental view on mid-caps is that we want to invest in companies that do all the hard work for us, essentially, and own them for a long period of time," said Thomas Browne, portfolio manager at Keeley Teton Advisors who runs a small- and mid-cap fund.
Many investors heading into 2025 worry the S & P 500 is overvalued after notching more than 20% advances this year and last. Wall Street strategists expect the broader index will return roughly 10% in the coming year. But mid-caps are more attractively valued.
Browne noted that the S & P 400 is trading at roughly 79% of the S & P 500 on forward P/E basis when it historically traded at roughly 107% of the broader index over the last 20 years—meaning mid-caps will have to eventually close this performance gap of 28 percentage points.
"There are so many junky companies in [the Russell 2000], and they could benefit theoretically here, but we would prefer to stay a little bit higher quality in terms of companies," said Luke O'Neill, portfolio manager at Catalyst Dynamic Alpha Fund.
O'Neill said his fund has roughly 40% to 50% exposure to mid-cap stocks and is bullish on several stocks such as Ralph Lauren and Evercore. Ralph Lauren has "double-digit growth potential over the next few years" due to corporate restructuring and a stronger premium presence in Europe. Another pick is Evercore, a mid-size investment bank poised to benefit from pro-business policies.
Keeley Teton Advisors' Browne named Columbia Banking System and Gen Digital as favorite stock picks.