Mid cap investing is simple choosing to purchase stocks that are valued between $2 billion dollars and $10 billion dollars.  This number is obviously rough and is obviously somewhat variable based on current market conditions.  If there is a big stock market hit and all companies are down 50% than a 3 billion dollar company isn’t necessary a small cap now when one year ago it was a mid cap, this is just a general bucket to place stocks in.

Why Mid Cap Investing?

The goal of buying in the middle of the road is to get the best of both ends.  The advantage of small caps is the potential for growth.   The advantage of large cap stocks is the safety in size and company experience.  When you pick the great mid cap stock you find that company that is on its way to becoming a large cap stock, but is already too large and experienced to get quickly destroyed by witty or forceful competition.  Unfortunately, there is the other end of the extreme or “the bad mid cap investing choice.”  This is when you’ve found a company that is overvalued into mid cap level and does not have the experience, quality of product, or cash to survive its way into a large cap.  This stock will flounder and disappoint.

Things to Look for in Quality Mid Caps

When you look at small caps you are looking for brilliant ideas that are providing real cash flow, when you look at large caps you are looking for moats of safety that allow you to predict current growth rates far into the future.  The trick with researching mid caps is you need to find companies that won’t get gobbled up or stopped by the nearest competing large cap stock.  You need to attempt to predict whose market this mid cap is going to step into in its growth curve and will it be able to survive the push back.

My favorite financial metric to look at for mid caps is their debt to equity ratio or debt to free cash flow.  When a company is small and growing like its tail is on fire some debt is understandable to get cash flow for all that growth.  However, those small caps that have surpassed that 2 billion dollar valuation need to mature as a business.  One of the biggest indicators of business maturity is debt reduction.   At some point the company has to learn to work with its own resources and quit leveraging its way out of trouble.  Also, in bad times a company with low debt has the ability to hunker down and weather a storm regardless if the storm is a bad economy or an attack from the competition.

Mid cap investing is an excellent place to start stock market investing on your own.  There is a real feeling of ownership in choosing your own stock investing and I believe mid caps will provide good enough returns with low enough risk to provide positive results for the beginner and experienced alike.