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Want Growth and Income? Mid Caps Make the Grade

Fin - Breakout - US

What has 400 players, is made up of companies generally worth $1 billion to $4 billion and has twice the clout it did a year ago?

I'm referring of course to the S&P MidCap 400 index. The belle of the ball in terms of performance in the post-recession rally had a 150% bounce off the March 2009 bottom -- as well as 5000 basis points of outperformance vs. the S&P 500.

Even so, the mid caps still have to fight for respect among strategists and portfolio managers, the majority of whom say they prefer the "safety and predictability" of the large caps. But if you're not one of those, then maybe the mid caps are for you.

Macke and I asked Standard & Poor's analyst Todd Rosenbluth to shed some light on the debate -- particularly that large caps offer better earnings prospects in times of uncertainty —- and he says the numbers speak for themselves. S&P 500 earnings are forecast to grow around 15% in the first quarter, while the MidCap 400 earnings are expected to rise by 22%.

While that's slower than what's predicted for the small caps, it's "still quite meaningful," Rosenbluth says.

Ultimately, what he likes about the mid caps is that they have some of the upside abilities of small names and at the same time many pay dividends. Put simply, they have both income and growth characteristics.

"The average dividend yield for the MidCap 400 index is 1.3%, so you're getting paid for some of the growth characteristics [that are] out there," he says.

The midcap measure covers more than 7% of of the U.S. stock market, S&P says, and energy and consumer staples make up the biggest groups in the index. (For more details on the index, visit S&P's MidCap 400 index page.)

Let us know what you think. If you have questions or comments, send an email to breakoutcrew@yahoo.com.

Chart by FactSet Research Systems