Five reasons why ASX Mid-cap stocks have been outperforming the others

Businessman hand giving money - Australian dollars

Recently, we are seeing that the blue-chip or the large cap companies are struggling in the market to please investors with high return in the current financial environment. But the scenario is different for mid-cap stocks, which have been seen with the capability of generating better returns from quite some time now.

Below are the five reasons on why ASX Midcap stocks have been outperforming the others:

  • Generate better earnings: Mid-cap stocks tend to generate better earnings as compared to the blue chip stocks, and this consequently is driving their performance. For instance, REA Group Limited (ASX: REA) continued to deliver a strong performance and is aggressively expanding its business via acquisitions across the globe. The group reported a 20% growth in revenues to $461 million for nine months ended March 2016 while EBITDA rose by 25% to $263 million. The company has also reported impressive 50% growth in cash flow to $146 million during the period. REA group stock generated 446.2% in the last five years (as of July 29, 2016) and we believe that the stock has more potential. As per the Bloomberg data, average growth in earnings per share for companies in the ASX 300 (entailing mid-caps) is forecast to be 14.9% over the next 12 months and 9.4% in the following year compared with 7.05% and 8.9% for the ASX 200.
  • Generate better returns for medium risk profile investors: Mid-cap mutual funds have been raising more money as compared to the large cap stocks given the lucrative returns they generate. Mid-cap stocks are usually a destination for medium risk profile investors when the general outlook remains cloudy. Moreover, investors invest their amount in these stocks to ensure they have suitably diversified portfolio of assets which provides them adequate returns over the longer term. This is clearly indicted by the performance of S&P/ASX 200 (INDEXASX: XJO) which gained only 5% for 2016 year to date (as on July 29, 2016) whereas S&P/ASX MIDCAP50 (INDEXASX: XMD) gave handsome return of 16.2%.



S&P/ASX Mid-cap50 Index Trend (Source: Economic Insights – Mid-sized Magic: MidCap 50 at 8-year highs by CommSec)

  • Proffer attractive investment option during economic recovery: Mid-cap stocks have generally generated higher returns post financial crisis of 2008 as compared to the large cap and small cap stocks. S&P/ASX MIDCAP50 (INDEXASX: XMD) generated over 79.8% returns since Jan 2009 (as of July 29, 2016) as compared to S&P/ASX 200 (INDEXASX: XJO) and S&P/ASX SMALL ORDINARIES (INDEXASX: XSO) of 55.3% and 53% respectively, during the same period. Further, mid-caps have good accessibility to capital for expansion plans and can gain more exposure to larger and/or faster-growing economies.
  • Companies are well positioned to leverage their target sector market opportunity: Mid-cap stocks tend to capitalize their target market opportunity by focusing on a specific area in the segment. The mid-caps also have more flexibility to disrupt the target industries. For example, NIB Holdings (private health insurer) is competing against leaders such as Medibank Private, and has delivered above-average growth on a continual basis.
  • Hidden gems even though the target sector’s outlook is challenging: Investors could still find lucrative mid-cap stocks investment opportunities even when the overall outlook for the target sectors is challenging. For instance, despite the gloomy sector outlook in Australia, Aurizon Holdings Ltd (ASX: AZJ), the rail transporter of coal from mine to port for export markets, was able to generate over 83.1% returns since its listing till date (as of July 28, 2016) driven by its steady performance. AZJ reported steady coal volumes in March quarter of 2016, although the shipments of iron ore and freight were slightly lower than previous year. The group hauled 49.4 million metric tons of coal in the three months through March 2016 and still expects annual volumes of 204 million-209 million tons in the year through June. Aurizon’s iron-ore volumes fell 3% year-on-year to 6.0 million tons, but it remains on track to meet an earlier projection of steady annual volumes versus last fiscal year’s 23.9 million tons. It also hauled 1% less freight as compared with the year earlier, at 9.3 million tons. Meanwhile, despite challenges, AZJ recently reported that they would deliver an Unaudited FY2016 Underlying Earnings before Interest & Tax (EBIT) of $871 million as compared to the guidance of $845-$885 million. The group is taking initiatives to control its cost base and looking for new ways to enhance the asset and labor productivity.

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