By Paul R. La Monica

(MONEY Magazine) – Investors Doting on "Middle Child"

• Most any family's middle child will tell you that her siblings get all the attention. The same can be said for the stocks of mid-size companies. Small-caps have growth potential. Large-caps are dependable. Midcaps get short shrift.

Not this year. Mutual funds that specialize in companies with a market value between $2 billion and $10 billion outperformed large- and small-cap funds through late July.

And this trend could continue. Companies in the S&P MidCap 400 index are expected to post an earnings increase of 15% this year and 17% in 2006. And although the index is up 8% this year, midcaps still look reasonably valued, trading at about 19 times 2005 earnings estimates. Small-caps offer about the same earnings growth, but at a P/E of 29.

"Midcaps have the best of both worlds: the high growth of small companies and the value and deep pockets of large ones," says Carl Marker, manager of IMS Capital Value, a midcap fund with a three-year annualized return of 19%. His fund's top holdings include E-Trade, Humana and LSI Logic.

Others say bargains abound in midcaps because the companies aren't as closely followed as large ones are. Paul Hogan, an analyst with FAM Value, a MONEY 50 fund, says his firm finds gems in areas that few analysts bother to cover. Examples? How about building materials outfits Florida Rock, Martin Marietta and Vulcan Materials? "You can't have an industry any more boring than crushed rock," Hogan says, but all three stocks have surged in 2005 due to increases in construction spending. --PAUL R. LA MONICA


Midcaps look better than big or small stocks.

NOTE: As of July 26. P/E ratios based on projected 2005 earnings. Earnings growth is compound annual rate projected for five years. SOURCE: Thomson/Baseline.


The Nasdaq--up 11% during the past three months--hit a four-year high in July.

NOTES AND SOURCES: Unless otherwise noted, data as of July 21. Index returns from Lipper, New York; 877-955-4773. Index levels from Bloomberg. Bond index data from Lehman Brothers. Stock data as of July 22 from Thomson/Baseline. Monthly S&P 500 ratios from Standard & Poor's. Ratios are based on previous four quarters of earnings. [1] Annualized. [2] Price change only.