Mid-Caps – The Hidden Champions?
Analyzing the In-Betweener Stocks
June 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Mid-cap stocks are less popular than small or large caps
- In the US, they only outperformed in one out of 10 decades
- Globally, they have done better, creating a conundrum for investors
INTRODUCTION
A few weeks ago, David Stevenson, a well-known journalist and entrepreneur, asked me about my view on mid-cap stocks. To my own surprise, I had no view. Although I’ve published more than 150 research notes on factor investing, quant strategies, and similar topics, there was not a single one amongst these that focused on mid-caps.
How could I have ignored these stocks? Especially as a German national, where the Mittelstand, i.e. the mid-sized companies, is famous globally for representing the true economic force of the German economy. Some of these companies are affectionally called the hidden champions as they sell unsexy products like chain saws or molding machines, but at consistently high profit margins that made quite a few of their secretive founders billionaires.
Furthermore, although I’ve read plenty of research papers on small and large-cap stocks, I can not recall a memorable one on mid-caps. This lack of attention makes these stocks intruiging as alpha does not hide in plain sight (read Factor Returns: Small vs Large Caps).
In this research note, we will focus on analyzing mid-cap stocks globally.
ETFS FOCUSED ON MARKET CAPITALIZATION
The lack of interest in mid-cap stocks by the investment community can be easily demonstrated by counting the number of ETFs focused on market capitalization in the US stock market. Using the filters from the website ETF.com highlights 131 ETFs focused on small and 422 ETFs on large-cap stocks, but only 64 ETFs on mid-sized companies.
