What is a Mid Cap Company?
Looking for a relatively safe equity investment with about as much upside as downside? For investors who like to stay right in the middle of the road, mid cap companies are a safe bet. These are typically stocks with a market cap between $2 billion and $10 billion. They’re established, but not enormous, with growth potential that requires a little bit of patience to realize. Investors striving for balance will appreciate the opportunities these companies offer.
Mid cap companies tend to be those fresh to the market—a recent IPO, divestiture or spinoff. There are also a good number of thriving companies that have hit their ceiling between the $2 and $10 billion mark. The relatively narrow range associated with this group makes it a very specific type of investment: a grounded one. Big enough to exhibit stability; not too big that growth comes slow.
Here’s a look at mid caps: what they are, what to expect from an investment in them and how they fit into a market filled with much larger companies.
What is Market Capitalization?
To understand mid cap companies, investors need to understand market capitalization. Market cap is the value of a company’s outstanding shares. It’s calculated by multiplying the current share price against the total number of shares. Mic cap companies are those whose total outstanding share value is between $2 billion and $10 billion.
For example, consider Stitch Fix Inc. (NASDAQ: SFIX). In July 2021, the company’s share price was roughly $63 with an average of ~71.8 million outstanding shares, for a market cap of roughly ~$4.52 billion. This positions the company firmly in mid cap territory.
Companies’ market capitalizations change with the ebb and flow of its share price. A stock might breach $10 billion in value, then fall below that threshold again the following week. Remember that market capitalization thresholds aren’t hard and fast—rather, they’re good guidelines for evaluating companies based on size.
Examples of Mid Cap Companies
As mentioned, lots of companies debut in the mid cap range, or come to rest here as a stepping stone on their growth journey. For example, recent IPOs like Beyond Meat Inc. (NASDAQ: BYND), Peloton Interactive Inc. (NASDAQ: PTON) and Datto Holding Corp. (NYSE: MSP) all debuted in the mid-cap range. Some other familiar stocks in this range include:
- Stitch Fix Inc. (NASDAQ: SFIX), $4.52 billion
- Upwork Inc. (NASDAQ: UPWK), $5.96 billion
- Crocs, Inc. (NASDAQ: CROX), $9.32 billion
- New York Times Co. (NYSE: NYT), $8.30 billion
- Mattel, Inc. (NASDAQ: MAT), $7.09 billion
There are as many as 400 mid cap companies listed today, with a consistent number climbing into and out of that range monthly.
Where do Mid Caps Fit into the Market?
As the name implies, these companies sit right in the middle of the scale, between small caps and large caps. It’s not a coincidence that, amongst all the stock classifications, this range is the narrowest ($2-$10 billion). Middling companies represent a transitionary range for investors to benchmark different investments. A company that’s recently entered the mid cap range might be on the come-up, while one that’s fallen from the top of the range to the bottom might be on its way down to small cap status. It’s a range that offers plenty of insight into trends and context for specific companies within their sectors.
The Benefits of Investing in Mid Cap Stocks
As a transitionary range, investors tend to look at these stocks for opportunities—whether for long-term investment or short-term trading. Here’s a look at some of the benefits associated with this group:
- Mid caps offer greater growth potential than large caps and better stability than small caps. This sweet spot makes them a balanced risk investment in equities.
- The tight window associated with these stocks allows investors to better-chart growth or regression trends based on proximity to upper and lower thresholds.
- They tend to exhibit growth in favorable credit environments. With access to the capital they need, they’re primed for growth.
Mid caps are something of a Goldilocks classification: just right for many investors. The balance of risk and reward, coupled with stability and upward opportunities, puts them on many investors’ radar when they’re trending in the right direction.
The Drawbacks of Mid Cap Investments
There are a couple important risk factors to note when considering middling companies as investment opportunities. Here are the most prominent potential drawbacks:
- Middling companies are at a pivotal point in their growth cycle and could go up or down, depending on the moves they make at this stage. A wrong investment could go south fast.
- There’s a squeeze on cash at this range, which can leave companies reliant on debt financing. As a result, these companies tend to have more encumbered balance sheets.
- Mid caps tend to lack diversification, meaning they’re still relying on one or two revenue streams. This puts them at-risk for competition or market disruption.
As you might imagine, the risk is well-balanced by their reward. These companies exist in the middle, for investors who want to invest in equities with a relative hedge against volatility.
Mid Cap Companies Show Upside Opportunity
If you catch them at IPO, mid cap companies have tremendous upside and major volatility. Snag a one that’s well-into its tenure and you’ve got a stock that’s sturdy and stable, ready to grow at a steady pace. Catch a large cap that’s coming down and mid cap could be its bottom: a foundation for it to climb again. This range is an exciting one for equity investors to explore, so long as they have the patience.
To learn how you can take advantage of mid cap companies to enhance your portfolio, sign up for the Liberty Through Wealth e-letter below. Discover the best ways to build wealth in your life by making smart investment decisions!
Mid caps aren’t going to swing the market by any large measure; but over time, they absolutely have the power to generate significant returns to those patient enough to hold.