Mid-Caps With Muscle

 | Apr 13, 2012 | 7:58 AM EDT
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There is nothing middling about mid-cap stocks, according to a recent report by Fidelity. They offer better growth opportunities than large caps and less volatility -- and less risk -- than do small-caps. In fact, as Fidelity reports, mid-cap stocks outperformed large- and small-caps for preceding three-, five-, 10-, 15- and 20-year periods, including on a risk-adjusted basis.

Further, mid-caps -- those with $1 billion to $10 billion in market capitalization -- are likely to continue to outperform. Fidelity notes that this is partly because the rise in these stock prices is being driven by earnings growth, and not increases in multiples or a general rise in stock prices.

In addition, these companies are a good size for acquisition-minded large caps. Between 1995 and 2011, 27% of merger-and-acquisition deals involved mid-cap companies.

So if your portfolio lacks mid-caps, now is a good time to add a few. Using the computerized strategies I employ to find promising investment opportunities, which are based on the writings of Wall Street greats, I have identified several mid-caps in that might fit well in your portfolio.

One such company is Domtar (UFS), a Canada-based leading manufacturer and distributor of paper that has a market cap of $3.4 billion. One strategy that likes this name is one I base on the writings of Ken Fisher. That's because of its price-to-earnings ratio of 0.71, which represents a solid value. In addition, the strategy views the company's debt amount to be acceptable, with an excellent inflation-adjusted long-term earnings-per-share growth rate of 18.79% and a very strong three-year average net profit margin of 7.5%.

Another company on a roll is a maker of bearings, Timken (TKR), with a market cap of $4.7 billion. In addition to its well-known bearings, it manufactures alloy steel and other components used with moving equipment or transmitting power. A strategy I base on Peter Lynch's approach to investing favors Timken. Especially appealing is the company's yield-adjusted P/E/G of 0.50 -- price-to-earnings relative to growth, a measure of how much the investor is paying for growth. A P/E/G of 0.5 or below is considered very strong, placing Timken right at the point of being in this most desirable territory. Also in the company's favor is its modest amount of debt.

HollyFrontier (HFC) has a market cap of $6.2 billion and the support of the Lynch strategy. This independent oil refiner has operations in five states, including Utah, New Mexico, Oklahoma, Kansas and Wyoming. The Lynch strategy calculates the company's P/E/G at an extremely low 0.12, and its debt level to be modest.

Smith & Nephew (SNN) is a U.K.-based medical-device company. Orthopedic devices account for a bit more than half of sales, while its other products address such markets as wound management, sports medicine and trauma. The company's market cap is $9.3 million. As with HollyFrontier and Timken, my Lynch-based strategy finds enough to like with Smith & Nephew to recommend it. The company's P/E/G, though not as strong as the others, is an acceptable 0.93, and its debt is quite low.

These mid-cap companies are strong performers with well-priced stocks. Such stocks have performed well during the past couple of decades. There is no guarantee they will continue to perform as they have in the past, but they are certainly worth your consideration.

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