Mid cap stocks can offer investors a “sweet spot” to balance their portfolios. As the nickname implies, these companies are neither small nor big. They may be able to provide the growth investors are looking for without the instability of startups or the slowdowns of big enterprises. 

What are mid cap companies?

Mid cap companies fall right in the middle, between small cap and large cap stocks, with market values from roughly $2 billion to $10 billion.

Most mid capitalization companies work their way into the medium value tier when their stock price rises after they demonstrate consistent profitability driven by a viable business plan. (Market value is a company’s current stock price multiplied by the number of shares outstanding.) Investors see this movement as a sign the company is poised to keep growing, while having the stability that small or young companies may lack. 

Although it happens less frequently, large cap companies can descend to mid-cap status. Clothing retailer Gap was ousted from the S&P 500 Index in February 2022. It reported a $152 million quarterly net loss in November 2021, sending its stock price plummeting 15% in one day. Sports apparel maker Under Armour joined the mid caps after it was booted from the S&P 500 in June 2022. It had a net loss of $59.6 million in the first three months of 2022. As of mid-September, both companies had market values of roughly $3.5 billion.

Other notable mid caps besides Gap and Under Armour include Alcoa, Avis Budget, Crocs, Nordstrom, and Williams-Sonoma.  

Most mid caps, though, are less prominent than their name-brand peers. This can open the door to investors willing to hunt for promising companies in industries that fly below the radar. Consider Badger Meter, with its market cap of $2.76 billion. The maker of flow-measurement and water-quality products reported double-digit earnings and revenue growth for the quarter that ended in June 2022. Then in August, it raised its dividend 12.5%, extending its streak of consecutive dividend hikes to 30 years. Its shares in the five years ended in mid-September 2022 had gained more than double that of the S&P 500 Index of large cap companies. 

Characteristics of mid cap companies

Even though mid caps are present in many different industries, they tend to share a number of characteristics, including:

• Growth

  . Mid caps are typically on a path to increasing earnings, revenue, market share, and productivity.

• Balance

  . Mid cap stocks can balance the volatility of smaller companies and the slowing profits and revenue of some big businesses.

• More products

  . Mid caps are generally less dependent than startups are on a blockbuster product that can sink a company if that product fails.

• Access to capital

  . Mid cap companies have demonstrated staying power, giving them enhanced access to capital markets and lenders to expand their business.

• Track record

  . Investors can evaluate mid caps on metrics including earnings and revenue growth, typically over a sustained time frame.

Evaluating mid cap companies

Investors can use traditional financial metrics to assess mid cap shares, including:

• Profit growth

  . Mid caps usually have been profitable for some time, giving investors confidence their business model works. Publicly traded companies report quarterly and annual earnings that compare the recent results to the same period a year earlier. Investors can look for stable or increasing numbers—or look for reasons for declines.

• Revenue growth

  . Mid caps have typically delivered revenue growth that’s helped boost their market value. Rising revenue can lead to wider margins, reduced debt, and economies of scale that bolster profits. Investors can study a mid cap’s gross and operating margins to see if they’re expanding; review inventory levels to make sure they’re falling; and assess the turnover rate of accounts receivable, to see if it's rising. A higher turnover rate means a company is quickly receiving payment for debts, which in turn increases cash flow. If none of these things is happening, it could be a sign that a company’s market cap is poised to decline.

• Balance sheet

  . Mid cap companies tend to have stronger balance sheets than small caps because they typically have more assets than liabilities. Investors can assess return on equity to see how well management is using capital from investors to generate profit.

• Price-to-earnings ratio

  . Investors can assess a company’s price compared to its earnings and other growth rates. A trailing price-to-earnings ratio (P/E) measures share price divided by the earnings per share for the past 12 months. A forward P/E uses forecasted rather than past earnings. Companies with no earnings or that are losing money do not have a P/E. In all cases, the lower the number, the less an investor is paying for a dollar of a company’s earnings. A high P/E ratio could mean that a company's stock is overvalued, or, conversely, that investors are expecting strong growth rates in the future.

• Returns

  . Investors can assess the company’s stock market performance through the return the shares generate. Total return measures the gain or loss an investor receives from a stock when the appreciation (or depreciation) of its price and income from any dividend are included. It quantifies the investment’s overall performance as a percentage.‍

• Dividends

  . Investors seeking dividend income in their returns often prefer large cap companies. However, some mid caps pay significant dividends. The S&P MidCap 400 Dividend Aristocrats index measures the performance of mid-sized companies that have increased dividends every year for at least 15 years.

25 companies that became mid caps in 2022

Investors can apply the metrics above and other traditional gauges to assess the 25 companies that officially became mid caps in 2022 as of August, by joining the S&P MidCap 400 Index. 

The companies are from different industries—energy, medical technology, nutrition and tech—and have some widely divergent features: a couple lack P/E ratios because they reported net losses, while one has a P/E of more than 500; two posted one-year total returns that have more than doubled, while a handful had negative returns; one even had a market cap that rose beyond the $10 billion threshold after a big rise in the share price.

The companies are listed in descending order from when they joined the index, starting with MACOM on Aug. 17, 2022 and ending with Calix on Jan. 4, 2022. The list does not include Gap and Under Armour, which were added to the index after losing their large-cap status. All data was derived from Y-charts as of Aug. 28, 2022.

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The bottom line

Mid cap companies fall between their small and large capitalization counterparts with market values of roughly $2 billion to $10 billion. They operate in diverse industries yet share unifying characteristics including growth potential, stability, access to capital, and staying power. Investors can use traditional financial metrics to evaluate the thousand-plus mid cap shares and to assess the prospects for the most recent mid cap entries.