Midsize Stocks - A Good Choice for Anyone's Nest Egg

It isn’t easy to find a stock that has the magic — an enticing financial elixir that combines stability with the promise of a decent rate of growth.

• Large-company stocks are relatively stable but move too slowly for many investors. 
• Small-company stocks’ value can rise quickly but could be seen as a gamble at a time in which investors aren’t exactly excited by the notion of taking on added risk. 

Say the experts: Find the middle. “The $2 billion to $7 billion market-cap range is really a sweet spot in the market,” says Don Easley, portfolio manager of the T. Rowe Price Diversified Mid-Cap Growth Fund.

“There are a lot of interesting companies in that area and there’s certainly a place for mid-caps in anyone’s portfolio.”

Stocks at these midsized companies aren’t called the“sweet spot”without reason. Indeed, the class of stocks that not too many years ago were classless — lumped in with large-cap stocks — has outperformed their larger and smaller peers. 

BetterInvesting uses annual revenue to determine a company’s category.

• For instance, midsized companies have annual revenues between $500 million and $5 billion. 
• Small companies have revenue below $500 million and 
• large-company revenue weighs in at more than $5 billion.

http://www.betterinvesting.org/NR/rdonlyres/9D3D3176-4E81-4D5D-90F7-19879D031A6A/0/cs.pdf

Screening for Mid-Size Companies

The companies screened should satisfy the following conditions:

1.  Past performances

• trailing-12-month revenues of between $500 million and $5 billion;
• five-year sales and earnings growth of at least 12 percent.

2.  Projected future performances

• forecasted five-year annual earnings and sales growth of 12 percent; and 
• a projected annual total return for the next three to five years of at least 12 percent. 

Also, look for Financial Strength and Earnings Predictability. 

As with any stock screen,this is just a starting point for research; no investment recommendations are intended.

Also, make sure any company of interest looks suitable on a Stock Selection Guide using your own judgments.

5 minute screening test to select the companies you wish to do deeper analysis

Investing is fun especially when you have a good strategy that is delivering positive returns consistently.  Patience is required to maximise returns.

Do you have a quick way to select the companies you wish to do deeper analysis?  It is very useful to have a good screening method that you can quickly apply to select these stocks, preferably within a short time of not more than 5 minutes.

Let me share here one of my screening methods.

1.  Selecting Growth Stocks

Look at  the Revenue, PBT and Earnings (or diluted EPS) over a 5 or 10 year period.

Select those companies that can deliver both topline and bottomline growths of 15% or more.

2.  The earnings must translate into positive CFO and positive FCF (= CFO-Capex).

3.  The debt of the company must be reasonable.  Debt/Equity < 50%.

4.  The PBT margin must be growing or at least maintain over these years.  Gross margin of at least 50% and net margin of at least 10%.

5.  Preferably the cash and cash equivalent should be more than the total debts of the company.

6.  ROE of at least 15%.

7.  The company should have declared dividends regularly, preferably also increasing dividends over the years.

8.  DPO ratio should be less than 50% and more than 30%.


Also read:

Secrets of successful investing by former king of remisiers: Prospect, Patience and Invest for Long-Term.

Those who have invested in good quality companies in the depth of the bear market of 2007 and 2008 would have enjoyed good returns in the KLSE to-date.