As is typically the case, mid-cap stocks produced a 3Q total return between the performance of the small and large cap cohorts. In the 3rd quarter, the S&P Midcap 400 (MDY), produced a +4.8% return, besting the S&P Smallcap 600 (IJR) at +3.2%, but lagging the large cap S&P 500 (SPY), which returned +8.9%. Likewise, the worst 50 mid-cap stocks lost around 20% on average in the third quarter, besting the 50 worst small-cap stocks, which were down roughly 30%, but trailing the 50 worst large-cap stocks, which lost about 17%.
In the table below, I have listed the 50 worst performing S&P Midcap 400 constituents over the third quarter of 2020.
Here are a few observations from this list:
- In the S&P 500, 14 of the 15 worst performers in the index were in the Energy sector. In the S&P Smallcap 600, 12 of the 15 worst performers were in the Energy sector. Among the 15 worst performers in the mid-cap sector, only 2 Energy companies – Murphy Oil (MUR) and WPX Energy (WPX) – were among the mid-cap laggards. As seen in the graph below, the Energy sector in the mid-cap index is only 1.2% of the total capitalization of the mid-cap index, even lower than the weight in the large cap (2.1%) and small-cap indices (2.8%). The mid-cap Energy companies that skirted the laggards list tended to be engaged in the production and/or transportation of natural gas, which recovered much more notably in 3Q, than oil.
- Financials were the largest sector on the laggards list. Smaller regional banks, which are grabbling with higher credit costs, potential issues in their commercial mortgage loan book, and rate-driven pressure on net interest margins were featured on the list. Banks uniquely pressured geographically by the COVID crisis, including 2 in New York and 1 in Hawaii were among the laggards.
- In Mid-June, I wrote an article entitled “The Only S&P 500 Stock Down Since the Market Bottom“, and referenced beauty products company Coty (COTY). The stock has fallen out of the S&P 500, and was now the 2nd worst performer in the mid-cap index. Sally Beauty (SBH) joined Coty on the laggards list at #5 as quarantined households continue to forestall purchases of beauty products and space out trips to the salon.
- Secular headwinds for brick-and-mortar retail were again in focus on the laggards list. Department store company Nordstrom (JWN) and mall operator Macerich (MAC) were the 14th and 15th worst performers on the quarter. There could be a value play inside Nordstrom in the form of discount retailer Nordstrom Rack, given the relative success of TJ Maxx (TJX) and Ross Stores (ROST), which now have a combined market capitalization of over $100B, or 50x that of Nordstrom. Bulls would probably like to see the company break out the EBITDA at those off-price locations given the high multiples at its peer stores.
I hope this list of midcap market laggards is an insightful view for Seeking Alpha readers. As the cyclical rebound broadens, I do expect mid-caps and small-caps to ultimately play catch-up. For those bottom-fishing on this laggards list, you should focus on businesses that have the capacity to generate cash flow and service their debts. Those companies will survive, and benefit from the ultimate recovery that should power these more economically-sensitive stocks higher. While we have seen returns tied to capitalization levels, we could briefly see mid-caps gain leadership as breadth expands from the large-caps before reaching down into the small-cap universe.
Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance and investment horizon.
Disclosure: I am/we are long MDY,IJR,SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.