During his recent interview with Tobias, Lawrence Hamtil, Principal and author at Fortune Financial Advisors, discusses why mid-cap stocks are better performers and rebound more quickly than other sectors. Here’s an excerpt from the interview:
Tobias Carlisle: One of the interesting things for me that came out of that post of yours, and this is something that an earlier guest, Ben Claremon, a point that he made, too; he said that mid-cap has tended to be the better market capitalization region to be in, and it’s delivered returns that are something like the returns to small cap, which have tended to be a little bit better, but it’s done that on a risk basis that looks more like large cap, so you get a little bit of the best of both worlds.
Lawrence Hamtil: Yes, and I think that that’s something that I’ve looked at, as well, and my theory behind that is that the mid-cap companies tend to be better, more higher quality, shall we say, than small-cap companies, but they tend to be less picked-over than the large-cap. I think that they’re probably have as a whole fewer analysts digesting their performance all the time. And so, they have this perhaps kind of an ability to be under the radar and still be worthwhile investments, that not everybody is looking at the so-called celebrity stocks and the large-cap sphere.
Lawrence Hamtil: So, yeah, I think whether you look at it from a risk-adjusted standpoint or even just an absolute return standpoint, they have been better performers. And when I do this kind of analysis, I always try to look at duration of draw-downs and the depth of it, and over the past several decades, mid-caps have tended not just to be the best performers but also, they’ve rebounded more quickly in general than other sectors of the market. And they tend to had a little bit shallower draw-downs certainly than small caps.
Lawrence Hamtil: So, I think that’s kind of the sweet spot, if you will, of the market. It has been historically, anyway; whether or not that it continues is, of course, anybody’s guess, but history would say that that’s where you would probably want to be.
Tobias Carlisle: Yeah, I tend to agree with you. I think that there are a few factors at play. One of them is that by the time they get to that size, they tend to have professional management, and they’re sufficiently well capitalized that they can survive some of the little bumps in the business cycle.
Tobias Carlisle: And then, in addition to that, there’s an enormous amount of professional private equity and professional activism that hunts in that region from sort of one billion to 10 billion, or two billion to 10 billion dollars. So, if they get out of line a little bit, there are…
Lawrence Hamtil: Right.
Tobias Carlisle: There are professional investors in there who are trying to push them back. And then, the other reasons you identified, too; they’re just not as picked over, so they tend to be a little bit cheaper. I don’t know if that’s always the case. It might not be the case. Remember, they have tended to be a little bit cheaper. Mid-cap is my favorite area.
Lawrence Hamtil: Yeah, and I think those are all very good points. I haven’t done this analysis, but I suspect it’s true in many foreign markets, as well. Just speaking from some rough analysis I did a while ago, I know in Germany, too, for example, that tends to be where the real dynamism is in their economy, is in the middle-sized companies.
Lawrence Hamtil: I don’t know how diverse it is on a public market basis, but I think that there’s a little bit of a under-discussed aspect of dynamism here, like what you’re saying, that if they get out of line, maybe outside investors will pressure them to make changes, something like that.
Lawrence Hamtil: It might be a little bit easier to accomplish that in a smaller company than a larger one. I’m not sure.
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