Money In The Middle

Eric McKissack says investors shouldn’t overlook mid-cap stocks

Stock markets and families may have more in common than meets the eye. In both cases, the biggest and smallest members get the most attention, while those in the middle can often go unnoticed. So it was in 2007, a year when shares of the largest and smallest companies generated much of the news. Experts held court on a flight to quality large-cap stocks as investors grew more cautious. All the while, mid-cap stocks somehow went neglected.

In a way, that’s fine with Eric McKissack, co-founder and CEO of Chicago-based investment firm Channing Associates, which has $700 million in assets under management. His sights are set on corporations with a stock market value between $2 billion and $15 billion. Mid-caps, McKissack argues, offer a bit of the best attributes from both ends of the market. They tend to be more stable than newcomers and their potential to deliver big leaps in appreciation is more akin to their smaller siblings.

In recent years, mid-caps have had their way with the market. While the large-cap S&P 500 posted average annual returns of 13.9% over the five years ending Oct. 1, 2007, the S&P Midcap index rewarded investors with 17.8% a year over the same stretch. But as 2007 drew to a close, short-term results indicated that the financial world’s credit crunch and the subprime mortgage fallout may be shifting the tide toward large-caps.

As a value investor, McKissack says that though the pickings in the market’s middle tract may have thinned, there are still solid investments to be found.

What’s the earnings outlook for mid-caps in 2008?

At the end of the most recent quarter, our portfolio traded at a price of 15 times next year’s earnings estimates. That’s slightly higher than the benchmark we use to track our performance—the Russell Midcap Value index—which was set at 14.6 times 2008 estimated earnings. Our holdings, meanwhile, have an estimated 15% five-year average annual earnings growth compared to 9.2% for the index. The difference in projections and values probably lies in the fact that we are not “deep” value managers that focus just on a stock’s worth, but that we often take positions in companies with sizeable growth projections in the future.

That’s pretty high growth for a value investor, no?
Well, we typically find companies with good opportunities that at the same time have a cloud over them. We take a position if, after our research, the picture is brighter than it seems over a long-term horizon of three to five years. In some instances investors may have been scared off by complex circumstances. If we’re willing to sort things out we can find good values.

What’s an example of a stock you think has been unjustly hit?
Fiserv (FISV) fits that mold. The company provides data processing and information management for banks, although it has branched out into similar services for health care and retirement plan administrators as well. It happens to be one of the leading online banking service software providers around, so it’s at the forefront of a

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