What is the middle market?
By general consensus, ‘middle market’ refers to companies with annual revenues between $5 million and $1 billion.
The sector is a huge piece of the economy, generating approximately $6.1 trillion in annual revenue — 40 percent of GDP. It’s also the nation’s bread and butter, employing 24.6 million people, more than all of the S&P 500companies combined, according to recent Deloitte research.
While diverse, they also tend to have two things in common: they are predominantly US-based and private, or family, owned.
How do you invest in middle market companies?
Because the are so often closely held, mid market companies are often out of the purview of the investing public.
Yet the public market offers plenty of options. On public stock exchanges, middle market companies are traded as “small cap” stocks, generally defined as having a market capitalization between $300 million and $2 billion.
You’ll find many of them in the S&P 600 index — a well-known index of small cap companies that trade on both the New York Stock Exchange and NASDAQ.
Some well known names include: Ethan Allen, WD-40, Liz Claiborne, and OfficeMax .
While middle market companies are known for their high growth prospects, they’re also more expensive than their larger corporate cousins. According to Standard & Poors, the estimated price to earnings ratio for the S&P 600 small cap index is 14.0 times 2012 earnings, while the same measure on the S&P 500 index is 10.8 times.
What middle market sectors are the best performers?
Representing ten industry sectors of the middle market, the S&P 600 index is diverse: financials (19.0%) and technology (19.3%) are the largest components, while utilities (3.9%) and telecommunication companies (0.7%), are the smallest.
The technology sector led the index lower, down 10.45 percent, whereas the utilities sector has been the year’s best performer, up 9.14 percent.
Overall, publicly traded middle market companies did not escape the third quarter’s savage market selloff, with the S&P 600 index down -4.58 percent this year.