Wall Street’s wild ride has shined a light on a segment of the stock market that’s often forgotten: midcap stocks. Considered less risky than their small-cap counterparts, midcaps—which typically have a market capitalization between $2 billion and $10 billion—are now less expensive than peers after the stock market’s punishing fourth-quarter selloff. The S&P MidCap 400 index trades at 14.3 times projected earnings over the next 12 months, down from 18.2 times at the end of 2017, according to FactSet. In comparison, the S&P 500 and the SmallCap 600 trade at 15.1 and 15.3 times forward earnings, respectively. “Midcaps are the orphaned index,” said Mark Fried, president of TFG Wealth Management. “When we sit down with clients and look at their 401(k)s, it’s one of the areas that we see the least used, but it should be a part of it. Now is a good opportunity since that part of the market is down." Midcaps have underperformed large and small-caps over the past year and are projected to post lower earnings growth, partly because of the composition of the index, said Susan Schmidt, head of U.S. equities and portfolio manager at Aviva Investors. Ms. Schmidt said the midcap index has greater exposure than the S&P 500 to industrial and financial stocks, two groups that have slumped amid trade tensions and slowing global growth. She said her firm has been buying shares of industrial companies recently because of their cheaper valuations. Earnings for companies in the S&P MidCap 400 are expected to grow 4.8% in the fourth quarter, according to FactSet. That compares with the projected growth of 10.4% for the S&P 500 and 6.3% for the S&P Small Cap 600. Over a longer timeframe, however, midcap stocks have outperformed. Since 1996, the average annual return for the S&P MidCap 400 is 10.4%, according to Dow Jones Market Data. That compares with 7.3% for the S&P 500 and 9.7% for the SmallCap 600. Are you snatching up shares of midcap companies? Let the author know your thoughts at jessica.menton@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location. |