Mid-caps are an often-overlooked investing option. These securities are viewed as big and safe compared to the highly volatile small-cap exposure. But when compared to the stability of large caps, these are relatively risky bets.
However, investors ignoring this key segment of the investing spectrum should note that the present development in the global economy makes the way clear for mid-cap investing.
Why to Stay Away from Large Caps
Notably, large caps have wider foreign exposure and thus any negative development pertaining to the global economy does not bode well for this category. This section is fraught with risks emanating from ongoing trade tensions, likely strength in the greenback and a slowdown in several foreign economies.
Trade tension between China and the United States has escalated of late with China levying tariffs on a variety of U.S. goods, including crude and gasoline, as a retaliation to President Donald Trump’s $50 billion levy on Chinese imports.
If this was not enough, in the latest G-7 summit, Trump criticized allies, mainly Canada’s prime minister Trudeau, which gives cues of the trade conflict even with the G-7 cronies. Worries over the future of the North American Free Trade Agreement (NAFTA) also flared up.
On the other hand, several developed economies, including the Eurozone, have been slowing down. The Eurozone economy expanded 0.4% sequentially in the first quarter of 2018, following a 0.7% rise in the previous period. Canada’s first-quarter GDP marked the slowest expansion since a 0.3% shrinkage in the second quarter of 2016. Meanwhile, the British economy expanded 0.1% sequentially in the quarter, representing the lowest growth since a 0.1% contraction in the fourth quarter of 2012.
This sudden slowdown in foreign economies might make some investors cautious about large-cap stocks because of their higher foreign exposure. Prospects of a stronger dollar, given a hawkish Fed, may also hurt such stocks.
How Long Will the Small-Cap Rally Last?
Meanwhile, the U.S. economy has been on the steady ground. This boosted small-cap equities, which are mostly domestic-focused. Apart from this, insulation from trade tensions and upbeat earnings sent small-caps rallying in recent times.
But at 20.3 times expected earnings, small-cap stocks are pricier than the bigger counterparts in the S&P, which has an expected P/E ratio of 17.5x, per Bloomberg. The difference of 2.84 times has increased from 2.16 at the end of March. So, the overvaluation of smaller caps is concerning.
Reasons for Mid-Cap Investing
All in all, the situation is not favorable for small or large caps. Thus, it is advisable to take a middle-of-the-road approach and gain exposure to a space that offers best of both worlds. In this regard, we highlight a few mid-cap stocks that have a Zacks Rank #1 (Strong Buy), a market cap between $1 billion to $5 billion and a year-to-date price increase of more than 50%.
Insperity Inc. (NYSE:NSP)
The company, formerly known as Administaff, Inc., is into providing an array of human resources and business solutions. It boasts a market cap of about $4.19 billion. The stock hails from a top-ranked Zacks industry (top 31%).
Restoration Hardware Holdings Inc. (NYSE:RH)
It is a luxury brand in the home furnishings marketplace with a market cap of about $ 3.48 billion. The stock comes from a top-ranked Zacks industry (top 42%).
Axon Enterprise Inc (NASDAQ:AAXN)
The company engages in the development, manufacture and sale of conducted electrical weapons for the law enforcement, federal, military, corrections, private security and personal defense market. The company has a market cap of about $ 3.70 billion. The stock belongs to a top-ranked Zacks industry (top 26%).
BJ’s Restaurants Inc. (NASDAQ:BJRI)
It owns and operates the restaurants, located in the United States. The restaurant chain has a market cap of about $1.23 billion. The stock hails from a top-ranked Zacks industry (top 40%).
Enova International Inc. (NYSE:ENVA)
The company with $1.214 billion of market cap is a provider of online financial services. The stock comes from a top-ranked Zacks industry (top 9%).
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