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Mid-Cap Stocks: Asset Class With An Identity Crises

By Glenn Dahlke
Published: September 10, 2007 in Fiat Money & Investing,

Much like the middle child, mid-cap stocks have long struggled to find their identity. Carved out from the upper echelons of the small caps and the lower end of the large caps, the mid-cap sector has a rough definition of stock with a market capitalization of greater than $2 billion, but less than $10 billion.

Taking components from both worlds, some analysts argue that mid-cap stocks can offer growth opportunities found in the small caps and the relative stability found in the large caps.

Within this rationale lies the argument for participation in mid-cap investing. Unlike the small caps that have not yet been seasoned by the market, nor like the large caps that have most of their growth behind them, there are those who claim that mid caps are in the “sweet spot” of the economy.

You might say that they have survived the rigors of childhood and are now ready for their years of growth and maturity into adulthood.

Still other analysts point out that this area is ripe for merger and acquisition targets. With premiums often being paid on the acquired stock’s value, an opportunity presents itself for the investor looking for a little “extra.”

There are literally hundreds of mid-cap stocks and, while some languish in obscurity, a number have widely recognized names. Abercrombie & Fitch, Circuit City, AutoZone, Marriott International, and Newell Rubbermaid all fit this category. Because this range is often a stop over point for the large caps, it goes without saying that the real heavy weights of the investment world have also spend at least some time here.

A number of indexes track mid caps, with The Standard & Poors Mid Cap 400 and The Russell Midcap Index being two of the more popular. The S&P 400 Midcap is a weighted index like the S&P 500, except that it covers the mid-cap sector of the U.S. stock market.

The Russell Midcap Index currently has a weighted average market cap of $7.5 billion and includes the smallest 800 stocks in the Russell 1000.

The Steele Mutual Fund Expert database contains about 1,200 funds within its mid-cap categories, although less than 220 have track records of 10 years or more and less than 50 have been around for at least 20 years. The vast majority of funds that adhere to the mid-cap style are actively managed funds.

For investors who follow an index approach, they won’t find as many choices compared to the large-cap index funds, but the number is growing.

Besides individual stocks and open-end mutual funds, exchange traded funds (ETFS) have also gotten into the act.

In recent years, mid-cap funds have started to receive substantial attention in the financial press. Using Steele Mutual Fund Expert as our source, they have come out from under the shadow of their bigger sibling, large cap funds, and turned in better returns.

For the three years from1/1/ 2002 through 12/31/2004, the 162 funds in the mid-cap blend averaged 9.40% and beat the 853 funds in the large-cap blend, which averaged 2.91%. Importantly, the mid caps did this with only slightly greater standard deviation. The 228 funds in the small-cap blend averaged 11.65% and boasted the best track record for this period, but had greater volatility.

While these results are not guaranteed in the future, they have helped the mid caps establish themselves as a formidable asset class. So, for those looking for a palatable mix between large caps and small caps, the mid- cap sector deserves serious consideration.

Popularity: 9% [?]

Glenn ("Chip") Dahlke, a senior contributor to the Living Trust Network (http://www.livingtrustnetwork.com), has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. If you have any questions or comments, Chip would love to hear from you. You may contact him by email at dahlkefinancial@sbcglobal.net (0)

Dividend Reinvestment Plans: Investing On Automatic Pilot

By Glenn Dahlke
Published: September 6, 2007 in Fiat Money & Investing,

If you’re like many investors who squander those small dividend checks from your stock portfolio, a Dividend Reinvestment Plan (DRP) might be just what you need. Just as its name implies, a Dividend Reinvestment Plan allows you to reinvest some or all of those dividends into more stock of the issuing company. Unlike purchases made through traditional means, partial or fractional shares, as well as whole shares, are available.

Technically, there are two types of DRPs. The first type involves buying shares at the market through an outside trustee. Although the company may subsidize the transaction costs, buying shares at a discount is not allowed.

The second type allows you to purchase directly from the issuing company, which may provide a discount from the market price. This is a distinct advantage over buying from an outside trustee.

Besides giving dividends a better purpose than sitting in your pocket or in a brokerage cash account, a DRP may offer other advantages as well. By buying on a regular basis, you are “dollar cost averaging” your purchases, an investment strategy designed to reduce volatility. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in the price. Of course you should consider your ability to continue purchasing through periods of low price levels. This type of plan does not ensure a profit or protect against loss.

Secondly, many companies offer added options with their DRPs, including purchasing stock at low minimums and sometimes even offering shares at a discount (often 3-5%) off current market prices.

From a tax standpoint, you are subject to income taxes on the value of the dividends whether you reinvest them or not. Your tax basis for all your shares including the reinvested dividends is the amount paid for the original shares plus the dividends, minus any costs deducted from your dividends as a service charge as part of the DRP.

Keeping good records is a necessity, especially if you plan to continue participating in a DRP over a number of years. Without the records, it may become very difficult to track all your purchases. A little bit of effort now can save you big headaches later on.

Usually, you will receive a quarterly statement outlining your DRP account. Among other things, these quarterly statements will detail your on-going investments, how many shares are held by the program, how many shares are held be you, and the value of all your shares.

Not all companies offer DRP’s but, for a list of one’s that do, there are many web sites dedicated to these plans. These internet sites not only have a full list of companies with DRPs, they also offers online enrollment services. For securities held in a brokerage or wrap account, check with your brokerage firm to determine if they have the means to enroll you. If all else fails, try either the company itself or its transfer agent.

Although it is easy to see the advantages of DRP programs to the investor, we should not overlook the benefits to the issuing company. Besides helping to stabilize market prices, a DRP is a relatively efficient way to raise capital and, because companies only “promise” to continue these programs in the future, the issuing company controls when and how much capital will be raised.

Over 1,000 companies currently offer some type of Dividend Reinvestment Plan and, with a little research, you should be able to get on the path of “automatic pilot” investing for the future.

Popularity: 7% [?]

Glenn ("Chip") Dahlke, a senior contributor to the Living Trust Network (http://www.livingtrustnetwork.com), has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. If you have any questions or comments, Chip would love to hear from you. You may contact him by email at dahlkefinancial@sbcglobal.net « Previous