Mid-Cap Stocks: A Compelling Combination of Strength and Promise

Do any of these promising mid-cap stocks belong in your portfolio?

Jan 23, 2014 at 5:15PM

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some mid-cap stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Guggenheim Mid-Cap Core ETF (NYSEMKT:CZA) could save you a lot of trouble. Instead of trying to figure out which mid-cap stocks will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual-fund cousins. This ETF, focused on mid-cap stocks, sports an expense ratio -- an annual fee -- of 0.68%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has outperformed the S&P 500 over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why mid-cap stocks?
Mid-cap stocks can be wonderful additions to portfolios because they've proven themselves to some degree, having grown to mid-cap size. And better still, they also have a lot of room to grow before they become large caps. It's worth noting that some of the mid-cap stocks heavily held by the ETF are on the large side.

More than a handful of mid-cap stocks had strong performances over the past year. Xerox (NYSE:XRX) surged 65%, for example. It delivered a lackluster third-quarter report, but its profit margins are growing and its return on equity rising as it sheds some noncore assets and aims to grow its higher-margin service businesses. Obamacare is helping, as Xerox inks long-term contracts -- e.g., processing all of California's Medicaid claims. With a forward P/E near 10 and a 1.9% dividend, the stock is intriguing.

Regions Financial (NYSE:RF) jumped 41%. The regional bank is focused primarily in the Southeast and emerged from the recent financial crisis in relatively good shape, having repaid its TARP obligation back in 2012. Its fourth quarter was a bit mixed, with earnings down from year-ago levels but full-year earnings up over the previous year and loans rising as well. Management says it's positioned well for long-term growth. Bulls are hopeful about Regions Financial's mobile banking ambitions. Regions tripled its dividend in early 2013, yields 1.1%, and has some expecting further significant increases.

Zoetis (NYSE:ZTS), spun off by Pfizer (NYSE:PFE), is the world's largest animal-health company. The stock is up 9% from its 52-week low and trading roughly in the middle of its 52-week range. Its 0.9% dividend was recently boosted by 11%. The company is growing abroad, recently winning approval to offer a vaccine for swine there, for example. Animal health is a huge market, pet ownership is on the rise, and Zoetis plays a major player in the field, with a pipeline of new offerings in the works. It does have competition, but it's also performing well and making some strategic acquisitions.

Other mid-cap stocks didn't do quite as well over the last year, but could see their fortunes change in the coming years. For example, cloud computing specialist Citrix Systems (NASDAQ:CTXS) sank 9%. It did get a boost in November, though, on news that it's developing business apps for Google (NASDAQ:GOOGL) Glass. Citrix Systems reports its fourth-quarter and full-year results on January 29. In its third quarter, revenue rose 11%, and cash flow grew. Analysts at Zacks have a neutral rating on Citrix, which they see growing in cloud-based storage and mobile platforms but also challenged by a sluggish economic environment.

The big picture
If you're interested in adding some mid-cap stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Google. The Motley Fool recommends and owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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