What Is Mid-Cap Value Stock?
A description of the shares of a company with a medium (or mid-sized) market capitalization that is trading below the stock's intrinsic value.
Understanding Mid-Cap Value Stock
Value investors typically seek out companies that are trading at a low price, as measured by common valuation metrics such as the P/E ratio and the price-to-book value ratio. When a stock has been identified as a value stock and its market capitalization puts it in the mid-cap range of the market, it is often referred to as a mid-cap value stock by investors.
Value investors actively seek stocks they believe the market has undervalued. Investors who use this strategy believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to buy the shares when the price is deflated and profit when there's a turnaround.
Generally, shares are sorted into three categories: small-cap, mid-cap, and large-cap. Values stocks of mid- to large-cap companies are thought to be less risky because they are proven profit generators with solid business models.
Keep in mind that estimating the intrinsic value of a stock is difficult. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept of value investing is that of "margin of safety." Value investors often seek to buy an equity at a big enough discount to allow some room for error in the estimation of value.
Additionally, value investing is subjective. Some value investors only look at present assets and earnings and do not place any value on future growth. Other value investors base their strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, the underlying logic is a value investor should buy something for less than he or she thinks it is currently worth.
One more hurdle for value investors to overcome, particularly with mid-cap shares that aren't well-known and don't have products that generate buzz, is waiting for the market to recognize the value the investor believes is there. There are plenty of obscure mid-cap value shares that languish quarter after quarter with few if any analysts following them and no attention from the financial press and websites.
Stocks with low P/E ratios tend to be low for a reason or sometimes many reasons. They may be facing new competition, have patents that are expiring, legal issues, management turnover; the list is endless.