Contented investors are a rare sight on Wall Street these days. But any still smiling probably had their money in mid-cap stocks. And the broadest grins probably belong to those whose money was indexed to the Standard & Poor's MidCap 400. For the year ended Feb. 28, the MidCap index returned 10.9%, compared with a 4.5% gain for the Dow Jones industrial average, an 8% loss for the large-cap Standard & Poor's 500-stock index, and a sickening 53% plunge for the Nasdaq Composite.
The 10-year-old MidCap represents an often overlooked segment of the market--and where the crowds don't go is sometimes where the best opportunities lie. From the end of 1990 through the end of February, 2001, the MidCap 400 returned 397.4%, a 17.1% average annual return, slightly better than the S&P 500's 16.4% and not far behind the Nasdaq. Powering this performance are many of the same forces driving the New Economy, such as improved information technology, corporations seeking efficiencies through outsourcing, and the need for more and better education and training. Demographics also count heavily with this group. The graying of the baby boomers is spurring growth at companies that can service their investment needs and at health-care providers who address their aches and pains.
So what's in this index? Some of the companies have short operating histories, but don't look for any initial public offerings here: S&P screens out companies less than six months old. And S&P tries to keep the companies' market capitalizations in the range of $1 billion to $5 billion. Turnover is high: Last year, 90 changes were made to the index--as companies merged, were acquired, or graduated to the S&P 500.
Companies are classified into one of 10 broad sectors. The biggest in market value is information technology, with 69 companies and a combined market cap of $163 billion. Tech is followed by financials (49 companies) and industrials (78 companies), with market caps of $133 billion and $130 billion, respectively. The total market cap for the entire MidCap 400 is around $850 billion--or about $150 billion less than the $1 trillion in combined value lost by Cisco Systems, Intel, and Microsoft in the past year.
Since the best performers often move up to the S&P 500, the MidCaps also serve as a farm team. So here, too, you'll find future members of the BusinessWeek 50, since that list is drawn from the 500.
To identify the MidCap's stars, we ranked the companies in the index on the basis of total return for the past year and over the past three years (ending Feb. 16). The sum of the ranks determined the overall ranking. In the event that two or more companies got the same numerical score, they were ranked as equals.
Financial stocks have been the stars throughout this economic boom. So it's not surprising to find a financial-services stock at the top: Investors Financial Services Corp. (IFIN
), a Boston company, acts as the back office for the financial-services industry, doing everything from computing prices for mutual funds to keeping shareholder records. The stock was sensational: a 309% gain last year and nearly 700% over the past three.
Investors Financial is not the only so-called e-processor in the spotlight. Others include SEI Investments (SEIC
), Concord EFS (CEFT
), DST Systems (DST
), Bisys Group (BSYS
), Jack Henry & Associates (JKHY
), and Fiserv (FISV
). In a way, these e-processors are better positioned than Wall Street firms: they're less exposed to the market's manic moves. According to Putnam Lovell Securities Inc. analyst Bradley J. Moore, who follows these companies, e-processors will continue to do well in 2001, as the larger firms step up their outsourcing.
Another trend that benefited our MidCap stars is cost containment in a time of rising demand for health care. Shares of No. 8 Barr Laboratories Inc. (BRL
), a generic-drug maker, have more than doubled in the past year. This is a tough business, but Barr has proved itself adept at getting Food & Drug Administration approvals for its generics ahead of rivals. Other winners: Ivax Corp. (IVX
), also a generic-drug maker, which posted record sales and earnings in 2000, and AmeriSource Health Corp. (AAS
) a drug distributor, which on Mar. 19 announced a merger with rival Bergen Brunswig (BBC
).
NEAR-DEATH. One of the biggest surprises is managed-care provider Oxford Health Plans Inc. (OXHP
) Three years ago, Oxford would have made only the list of fallen stars. Its computer systems could not keep track of bills or payments, and its doctors and medical providers were up in arms. But Oxford has snapped back from its near-death experience. The company has refocused operations and cut costs. Today, Oxford is a regional provider, serving New York, New Jersey, and Connecticut. Questions remain: Recently, the stock dropped because of concerns about Medicare contracts with some of its hospitals. Goldman, Sachs & Co. believes that the worries are overblown and has raised earnings targets by 10 cents a share for both 2001 and 2002, to $2.60 and $3.00, respectively.
Tech, once the darling of investors, has become a four-letter word on Wall Street. But if there are any tech investors left standing, they may want to look at Rational Software Corp. (RATL
) Its software lets companies build e-biz applications 50% faster than rivals'. Although the stock trades at half of its 52-week high, Rational has still returned nearly 37% over the past year and almost 600% over the past three. And this is not a case of irrational exuberance: Rational Software is profitable, earning $65.5 million, on sales of $573.3 million, in the first nine months of fiscal 2001.
In the somewhat obscure mid-cap sector, many of the companies are not household names. But one name you probably do know is Scholastic Corp. (SCHL
), whose magazines and books have been schoolkids' companions for generations. The reason Scholastic is a stock market star of late is the fictional boy wizard, Harry Potter. The Potter books are expected to bring in $200 million in sales in fiscal 2001. But Scholastic is more than just a one-broomstick wonder. The company publishes a core reading series for grades K-5, and investors anticipate strong profits as the states and the federal government ramp up education spending. (BusinessWeek is a unit of The McGraw-Hill Companies, a major educational publisher.)
For more people nowadays, schooling is a lifelong pursuit. Two of our stars, DeVry Inc. (DV
) and Apollo Group Inc. (APOL
), are capitalizing on that. DeVry, based in Oakbrook Terrace, Ill., operates more than 45 schools, offering vocational training and technical degrees. In the first half of fiscal 2001, earnings are up--along with enrollment: Net income at DeVry rose more than 20%. Apollo runs the University of Phoenix Inc., an online university offering degree programs at a fraction of the cost of most private colleges. In 2000, it netted $71.2 million, on revenues of $610 million.
Some of the companies on our list will never move up to the S&P 500. They'll get acquired by bigger companies that are already in the big-cap index. That's the route that Litton Industries Inc. (LIT
), a defense-electronics maker, is taking. It's set to be taken over by Northrop Grumman Corp. (NOC
) in a $5.1 billion deal. Dreyer's Grand Ice Cream (DRYR
), with a tiny $850 million market cap--far too small for the S&P 500--is considered a natural acquisition for a giant food company.
If the smart money is shopping for investment opportunities among the mid-caps, maybe you should be, too. |
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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