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Mid-Cap Stocks: A matter of size

Falling between small-cap and large-cap stocks in potential risks and returns, mid-caps can play a role in a diversified portfolio, particularly at certain points of the business cycle, as Dave Sandstrom explains in a Money Talk Video. Dave spoke with Joel Dresang. A transcript of their conversation follows.

Joel Dresang: Dave, we talk about diversifying the stock portion of our portfolios: Value orientation, growth orientation. But we also talk about the size of the companies: The large-cap and the small-cap. I want to talk today about mid-cap stocks. Let’s start with a definition.

Dave: Joel, when we refer to small-caps, mid-caps, large-caps, the “caps” portion of that is short for market-capitalization. So to arrive at that number, you take the share price, multiply it by the number of shares outstanding, and that number approximates the size of the company. And right now, $2 billion to $10 billion would signify the mid-cap area.

Joel: So mid-cap, I’m guessing, would have some of the traits of small-cap stocks, some of the traits of large-cap stocks. Give us some of the highlights for what investors should consider here.

Dave: Well, you think about small-caps, maybe a little more nimble. They typically will lead us out of recessions and be the fast starters. Large-caps will kind of take over in the business cycle. They do a little bit better in recessions. They’re bigger. They have more staying power. So the mid-cap kind of fits in between and can give you some of the benefits of both of those asset classes.

Joel: So you’re talking about business cycles. We think we’re in the latter stages of the business cycle, although we don’t know how long that is. Are there any extenuating circumstances in this cycle that affect mid-caps?

Dave: Well, different economic environments can certainly have an impact on companies, and the size of the company will dictate how well they perform.

So, right now we’re looking at a very strong dollar, and in that environment, that puts some pressure on large-caps and companies that rely a lot on exports. It makes exports more expensive to sell around the world, and it also reduces the value of your foreign earnings when you repatriate the profits back to the United States. So, mid-caps and small-caps, have a tendency not to rely on exports as much. So a mid-cap or a small-cap that doesn’t rely on exporting or those foreign earnings as much, this could be an environment that could be a little bit of a tailwind for them.

Joel: What about the regulatory climate? There are expectations that there’s going to be more deregulation in the U.S. How does that affect mid-cap stocks?

Dave: So we think about heavy regulation. You think about having to allocate resources to that. So the big companies have the big legal teams, the big accounting departments to handle lots of regulation. Smaller companies may not have the ability to weather that as well. So mid-caps could definitely benefit from an environment with less regulation.

Joel: And Dave, whenever we talk about diversification, it’s never all one thing. You’d want some mid-cap but also some small-cap and some large-cap within your portfolio.

Dave: Joel, you’re correct. I think moderation is very important, especially when we get into a situation with introducing some of the asset classes that might carry some more volatility. Mid-caps and small-caps would definitely be in that category.

I think the real important thing is to always have a very good plan in place and to know what your time horizon is for needing that money, because any time you invest in something that’s going to have a higher volatility, you should be using those assets for your long-term money and not something that’s going to be required in the short term for either income or expenses.

Dave Sandstrom  is vice president and advisor at Landaas & Company.

Joel Dresang is vice president-communications at Landaas & Company.

Money Talk Video by Peter May and Jason Scuglik

Learn more

Stocks: Long-term, consistent returns, a Money Talk Video with Dave Sandstrom

Value & Growth: Going deeper, a Money Talk Video with Brian Kilb and Marc Amateis

Investors and the business cycle, a Money Talk Video with Dave Sandstrom

Investing large late in the cycle, a Money Talk Video with Steve Giles

Sizing up stock investments, a Money Talk Video with Brian Kilb

(initially posted Feb. 22, 2017)

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