In a recent episode of Zephyr's "Adjusted for Risk" podcast, Ryan Nauman, the market strategist at Zephyr, delved into the often-overlooked world of mid-cap investments with Kirk McDonald, a portfolio manager at Argent Capital Management. The conversation shed light on the unique characteristics and performance potential of mid-cap stocks, often overshadowed by their large and small-cap counterparts.
Exploring the Mid-Cap Space
Mid-cap stocks are companies with market capitalizations typically ranging from $1.5 billion to $50 billion. Despite their substantial size, mid-caps often go unnoticed compared to the attention given to large and small-cap stocks. According to Kirk McDonald, one reason is the common perception associated with the term "middle," which often carries negative connotations. However, mid-caps represent a crucial segment of the investment landscape, offering unique growth opportunities and stability.
Traits of Enduring Businesses
Kirk highlighted Argent Capital’s focus on identifying enduring businesses—companies that exhibit three key characteristics: growing cash flows, a durable competitive advantage, and effective capital stewardship. These businesses, when identified, become long-term portfolio holdings, offering stability through low turnover rates and concentrated investment strategies.
Challenges and Opportunities in Mid-Cap Investing
Despite their overlooked status, mid-caps present opportunities. They offer the potential for higher returns compared to small caps and lower volatility than large caps, resulting in an impressive Sharpe ratio. However, mid-cap stocks are less followed by Wall Street analysts, which can be both a challenge and an opportunity. This lack of coverage creates inefficiencies, allowing active managers like Kirk to uncover hidden gems.
Historical Performance and Market Cycles
Historically, mid-cap stocks have outperformed over the long term, boasting superior risk-adjusted returns. Kirk noted that mid-caps excel by avoiding being the worst-performing asset class during market cycles. While they may not always lead during bull markets, their steady performance positions them strongly over complete market cycles. In bull and bear markets alike, mid-caps often outperform their larger and smaller counterparts.
The Mid-Cap Edge: Long-Term Investment
Kirk emphasized the importance of a long-term investment approach in mid-caps, highlighting that they tend to shine over extended periods. Notably, mid-caps have demonstrated consistent outperformance in rolling five and ten-year periods, offering a compelling case for investors seeking durable returns.
Future Outlook and Industry Misconceptions
As we move through 2025, Kirk expressed optimism about the potential of mid-caps, particularly given their attractive valuations compared to large caps. Furthermore, he dispelled misconceptions that mid-caps are fallen angels, emphasizing that many mid-cap companies, like Nvidia in its earlier days, are on a growth trajectory.
Closing Thoughts
The conversation with Kirk McDonald offered valuable insights into the often undervalued world of mid-cap stocks. With seasoned management teams, strategic growth potential, and unique market positions, mid-caps provide a compelling investment opportunity for those willing to take a long-term perspective.
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Conclusion
Investors looking to diversify their portfolios and tap into unexplored potential should consider the robust opportunities within the mid-cap space. Whether you're an experienced investor or just starting, mid-caps offer a unique blend of growth, stability, and long-term value.