Investor who nearly doubled the return of her index says these three midcap shares are ripe for the financial restoration


During this phase of the bull market, money has crowded into large-cap stocks, especially growth stocks.

Diversifying into smaller companies can reduce risk and get you into a part of the market with mature opportunities at the right time. You can do this with midcap stocks.

Below are three mid-cap stocks selected by Amy Zhang to fund the Alger Mid-Cap Focus Fund AFOIX with a volume of $ 903 million..
The small-cap fund has a four-star rating (out of five) from Morningstar and is closed to new investors. The midcap fund does not have a Morningstar rating as it was launched on June 14, 2019. It is still open and its performance is among the top 5% of around 600 funds in the Morningstar Mid-Cap Growth category in 2021 and 2020.

Here is a comparison of the Class I total returns of the Alger Mid-Cap Focus Fund and the Russell Mid-Cap Growth Index RMCCG, + 0.50%,
its benchmark since the fund’s inception. As you can see, the mutual fund nearly doubled its benchmark return.

Fact set

The Alger Mid-Cap Focus Fund generally holds around 50 stocks. Zhang also manages the Alger Mid-Cap 40 ETF FRTY, + 0.08%,
which was founded in February and has a similar strategy but typically holds 40 stocks.

Read: Why US Midcap Stocks According to Citi. could shine in the coming year

In an interview, Zhang Midcaps called “the best of both worlds” because there are good values ​​off the beaten track and because there are also growth games.

In the small-cap fund, Zhang typically picks healthcare or tech companies because there is so much innovation in these sectors. But even small caps require extensive research – many companies are likely to be unprofitable for years. The risks are high when a company only offers one product or service.

When choosing midcap stocks, Zhang follows the same strategy of investing in “positive dynamic change” that she does for small caps. But, she said, for the midcaps “we have the growth case and others who are involved in the” [economic] Recreation.”

Midcaps tend to have a higher financial quality and more diversified sources of income than small caps. Therefore, Zhang could pick a stock in any industry, she said. She also said that the Alger Mid-Cap Focus Fund is not sector-allocation tied as the company’s strategy “is really about stock selection”.

At the end of September, the fund was “overweight in financials and industrials” relative to its benchmark, she said.

“In times like this year, when the market is so macro-driven while we are still focused on high quality growth companies in the midcap space, [have had] more exposure to cyclicals, ”she said, adding that the economic environment resulted in midcaps performing better than small caps in 2021.

Three midcap stocks

Zhang highlighted three of the largest holdings by the Alger Mid-Cap Focus Fund. Here they are, with consensus sales estimates for calendar years through 2023, along with the expected two-year average annual growth rates (CAGR) for sales (in million dollars) and price-to-earnings (P / E) ratio:


Estimated sales – 2021

Estimated sales – 2022

Estimated sales – 2023

Estimated sales CAGR

Forward P / E

Upstart Holdings Inc.UPST, -4.21%

$ 756

$ 1,079

$ 1,376



Signature bank SBNY, -3.79%

$ 1,969

$ 2,349

$ 2,804



Herc Holdings Inc. HRI, -2.10%

$ 2,087

$ 2,447

$ 2,831



Source: fact set

These are high expected CAGR for sales. In comparison, an aggregated 2-year CAGR of only 2.5% is expected for the S&P S&P Small-Cap 600 SML, + 0.08% index and 5.5% for the S&P 400 Mid-Cap Index MID, + 0.26% by 2023 The price / earnings ratios for the indices are shown below.

Upstart stocks

Upstart Holdings Inc. UPST, -4.21%, has developed a cloud-based lending platform for banks that uses artificial intelligence. The service started with an optimized platform for unsecured consumer credit, including application, subscription and service. The company added a similar auto loan service in 2020. The service is cloud-based; The company said that in 2020, more than half of the customers who received loans through Upstart had applied on their mobile phone.

“We really believe that over time, they will be the one stop shop potentially entering cards, mortgages, point-of-sale loans, and home equity loans,” Zhang said. She likes the setup – a company with a small share of the huge US credit market.

The company went public in December 2020. This is an early stage game with small-cap-like features, including very high forward P / E ratios. But the high P / E ratio isn’t meaningful at this early stage when a fast-growing company is looking to growth rather than profit.

Wall Street analysts expect the company’s rapid growth to continue, as you can see in the table above, and Zhang expects profit margins to improve “as they scale”.

Signature bank

Signature Bank SBNY, -3.79% of New York, is a fast growing regional player in an industry that most investors do not associate with growth. The expected CAGR turnover of 19.3% from 2021 to 2023 is the highest among the 24 banks in the KBW Bank Index BKX, + 0.87%.
(The index includes the largest US banks, with the exception of investment banks.)

Zhang believes “there is room for multiple expansion” because the price / earnings ratio of the stock is in line with slow-growing mid-cap banks.

She is particularly impressed by Signature Bank’s Signet digital payment platform, which enables real-time payments between business customers at any time. Signet uses blockchain technology. The real-time aspect of the service is more important than you might think – bank transaction processing has traditionally been an overnight business as mainframe computers process billions of transactions in batches outside of business hours.

Zhang said Signet represented the bank’s “optionality in cryptocurrencies” as Bitcoin and other digital currencies are more widespread.

Herc stocks

Herc Holdings Inc. HRI, -2.10% rents heavy equipment through subsidiaries including Herc Rentals. It operates in more than 270 locations in North America. The company was spun off from the old Hertz Holdings (now known as Hertz Global Holdings Inc. HTZZ, -13.04%) in June 2016.

Herc has two major US competitors: United Rentals Inc URI, + 0.91% and Sunbelt Rentals, a unit of Ashtead Group PLC AHT, + 0.30% ASHTY, + 0.54%.
Zhang described Herc as “a catch-up process” that is well positioned to gain market share as his management team had the right cost to replace its obsolete rental fleet.

She expects an improvement in Herc’s margins and a “re-evaluation” of the company by investors, which means an expansion of the P / E ratio.

The prospect of an infrastructure bill passed by Congress and signed by President Biden would give the company a tailwind, Zhang said. Political developments aside, “We all know the supply chain problem that has kept projections high this year. Herc is a solution for that, ”she added.

A discounted group of shares

Large-cap stocks get the most coverage in the financial media – and rightly so, considering how fast and consistently the tech leaders have grown. Broad index funds are excellent, inexpensive investments, but if you are in one you might be surprised at how much of your money is concentrated in a small number of stocks.

The best example is the SPDR S&P 500 ETF Trust SPY, + 0.77%, which is 22% focused on just five companies: Microsoft Corp. MSFT, + 0.31%,
Apple Inc. AAPL, + 1.51%, Inc. AMZN, -0.08%,
two common share classes in Google holding company Alphabet Inc. Demokratie, + 0.60% GoogL, + 0.32% and Facebook Inc. FB, +1.39%.

The S&P 500 Index SPX, +0.74%, is the US benchmark and is weighted according to market capitalization. Since there is no upper limit for the company size, it always has to be much more concentrated than the S&P Small-Cap 600 Index and the S&P 400 Mid-Cap Index.

In addition to Zhang’s “best of both worlds” arguments in mid-caps, you might be surprised that mid-caps (or small-cap) price-earnings valuations have not risen nearly as much as large-caps. Cap stocks.

And the same goes for small caps.

Timothy Skiendzielewski, who manages the Aberdeen US Small Cap Equity Fund GSCIX, + 0.73%,
recently argued that profitable small-cap companies are great assets in the current marketplace.

Using the data compiled by FactSet, here is a comparison of the current weighted price-earnings ratios for the three broad S&P indices, showing that the midcaps and small caps are not trading at valuation much higher than usual and that their current discounts The rating of the S&P 500 is much higher than usual based on long-term averages:

Price / earnings ratios



3 year average

5 year average

10 year average

15 year average

20-year average

S&P Small Cap 600







S&P 400 mid-cap







S&P 500







Percent of the price / earnings rating of the S&P 500


3 year average

5 year average

10 year average

15 year average

20-year average

S&P Small Cap 600







S&P 400 mid-cap







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