February 19, 2025

Midsize Market Capitalization Stocks: The Hidden Investment Gems for 2025

Midsize Market Capitalization Stocks: The Sleeping Giants for 2025

The Market’s Overlooked Segment

As we venture into 2025, the investment landscape is filled with uncertainty regarding interest rates and stock valuations. Among the various segments of the market, there’s a silent performer waiting for its moment in the spotlight: midsize market capitalization stocks. Generally characterized as companies with market values between $2 billion and $10 billion, this class of stocks has evaded the limelight while large caps, particularly tech giants, have soared. However, the tides of the market may soon favor these forgotten “middle children.”

Large-Caps vs. Small-Caps: The Numbers Don’t Lie

Big tech has had a spectacular run, but the S&P 500 is trading around 22 times next year’s projected earnings, a figure that nearly ties a 20-year high. While small-caps are drawing attention due to their lower valuation, it’s crucial to understand why they’re trading cheaper. A mere 60% of small-cap companies have managed to post profits in recent years, resulting in a substantial drag on returns. This disparity sets the stage for mid-cap stocks to flourish.

The Sweet Spot of Midsize Ships

According to FactSet, the iShares Core S&P Mid-Cap exchange-traded fund, which targets midsize companies, is currently trading at a much more attractive valuation of roughly 16 times the anticipated earnings for 2025. Furthermore, analysts expect a solid earnings per share growth rate of 13% for these companies in 2025. While this may not entirely match the S&P 500’s projected growth of 14%, the risk-reward ratio for mid-caps is compelling, especially given their strong balance sheets. BofA Securities analysts Jill Carey and Nicolas Woods labeled this the “time for mid-caps to shine,” noting their resilience in the face of rising long-term interest rates.

Political Climate Favoring Domestic Players

The forthcoming political landscape, particularly under a potential President Donald Trump, could also serve as a catalyst for mid-cap stocks. J.P. Morgan recently highlighted that his anticipated tariff agenda may boost domestically-focused companies, favoring both small- and mid-cap stocks over larger multinationals that rely heavily on international markets. Stocks like Amphastar Pharmaceuticals, Dundee Precious Metals, and Dole were spotlighted, with Dole particularly standing out due to its attractive 9 times 2025 earnings valuation and anticipated earnings growth of about 15%.

The Schwartz Value Focus

The $53 million Schwartz Value Focused fund emerged as the top-performing mid-cap blend fund in 2024, delivering an impressive 39% return. This fund is heavily invested in energy—with notable stakes in Texas Pacific Land Corp. and Devon Energy—as well as consumer brands like Yeti Holdings. Timothy Schwartz, a co-manager of the fund, believes that despite Yeti’s tumultuous history post-IPO, the company deserves another chance. Trading at just 13 times expected 2025 earnings, he is optimistic about its potential for high-single- to low-double-digit sales and earnings growth. “It’s overlooked by the market,” he asserts, reflecting the opportunity that exists amidst the noise of more popular stocks.

Political and Economic Optimism Ahead

With increasing optimism regarding political developments and favorable economic conditions, 2025 could easily become the year for mid-cap stocks. While large-caps may appear attractive and small-caps sport lower valuations, it is the midsize companies that have the potential to deliver superior returns. They combine the benefits of growth with more manageable risks, all while being overlooked by a market fixated on the extremes of size and valuation.

In conclusion, as traditional financial principles advocate for a well-rounded portfolio, now may be the time to consider adding some mid-cap stocks to the mix. With their comparatively strong fundamentals, favorable valuation, and a potentially supportive political environment, these companies could become key players in the investment arena come 2025. It’s essential to pay attention to these hidden gems that have long remained underappreciated in the investment world.

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