As Europe continues to struggle with debt issues and the United States battles its political gridlock, some analysts are predicting slow to no growth for the economy throughout the upcoming year. High unemployment, low consumer confidence and impending austerity plans do not make for healthy markets. To that end, many advisors are now shifting portfolios to heavy allocations in dividend stocks. Funds like the Vanguard High Dividend Yield ETF (ARCA:VYM) have exploded in popularity as investors have flocked to dividend-focused investments. However, dividends aren't the only way to keep a portfolio growing in a sideways market. One group of goldilocks stocks could be the key to a profitable new year. (For related reading, see Finding Value In A Sideways Market.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Right in Middle
Mid-cap stocks could be exactly what a portfolio needs to get through 2012. These firms, with market caps between $2 billion and $10 billion, provide the right mixture of attributes for a slow-moving market. These stocks typically enjoy strong cash flows, stable business models and less volatility than smaller equities. Plus, midcaps are just small enough to grow faster than their larger counterparts. These factors have helped the market sector outperform both its larger and smaller sisters over long stretches of time. During 2010, the SPDR S&P MidCap 400 ETF (ARCA:MDY) increased by an impressive 25%, while the large cap-based SPDR S&P 500 ETF (ARCA:SPY) returned only about 13% during the same time period. Over the last 10 years, the MDY returned around 73% to SPY's approximately 9%.

However, investing in mid-cap equities may be appealing to investors on another front: increased acquisition activity. The recent buildup of company cash over the past few years has produced a buyout binge not seen in years. Currently, large-cap firms are sitting on around $1 trillion worth of cash and equivalents on their balance sheets. Reluctant to hire or open new plants, many large firms have gone on acquisition sprees to spur growth. Mid-cap firms are often the targets of these buyouts, and the market segment should perform well as merger and acquisition (M&A) activity increases. The sector seems ripe for this investment as the global crisis has left mid-caps at their lowest valuations since the early 1990s. Several indicators, such as price to sales ratio, are still near historical lows, and earnings forecasts have still been robust. (For addtional reading, see How To Analyze Mid-Cap Stocks.)

Playing the Midcap Space
With their strong growth potential and stability, mid-cap firms could be exactly what the doctor ordered during this sideways market. Funds like the Vanguard Mid-Cap Value ETF (ARCA:VOE) and WisdomTree International MidCap Dividend (ARCA:DIM) make adding broad swaths of mid-sized firms to a portfolio easy. However, individual mid-caps can be attractive on a case-by-case basis, as most professional equity analysts often ignore the space.

Here are a few picks:

Feeding the world's growing population continues to be a chief concern. Mid-cap agriculture processor Bunge (NYSE:BG) is poised to benefit from that trend. The firm is currently trading for below book value and has a cheaper PEG ratio than large-cap rival Archer-Daniels Midland (NYSE:ADM). Bunge has its hands in everything from grains processing to biofuels and currently yields 1.7 percent.

Global fiscal concerns, consolidation and increased demand have all benefited mid-cap or junior gold miners. IAMGOLD (NYSE:IAG) represents an interesting mid-sized play in the sector. The miner has continued to add new supply, and shareholders have recently been rewarded with a 25% increase in the firm's annual dividend.

Recently obtaining dividend aristocrat status, Genuine Parts (NYSE:GPC) distributes a variety of electrical and industrial parts for the automotive and manufacturing sectors. The firm is poised to benefit from increased automobile ownership in emerging markets and recently reported record sales and earnings for Q3 2011. In addition, GPC also delivered its 11th consecutive positive earnings surprise and yields 3.1%. (For more information, check out Dividend Yield For The Downturn.)

Bottom Line
With many analysts predicting slow growth for the new year, investors may want to consider mid-cap stocks for their portfolios. Featuring the right amount of growth and stability, coupled with the recent buyout binge, mid-caps should continue their outperformance.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  6. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!