PERSPECTIVE3-5 min to read

Ready to invest in companies and products you know? Consider mid caps

A number of mid-sized firms are household names that deliver products and services products used in everyday life.

20/03/2024
Spark

“Invest in what you know” is a frequently quoted tip coined by the legendary investor Peter Lynch. Often, that is interpreted as advice to stick with the large-capitalization companies that are household names such as Apple, Johnson & Johnson or Pepsi. But what is often not recognized is that the mid-cap universe is filled with a number of companies that have equally well-known brands.

Even though the large-cap technology stocks, in particular, have posted stellar returns recently, there are advantages to including mid-cap stocks in a long-term portfolio. Mid-caps are often viewed as a sweet spot for equity investors because they can offer the best of both worlds. They can provide growth opportunities that rival some of the gains made by younger firms in the small-cap space, but mid caps are also typically older more established businesses that can provide a degree of the stability their large-cap counterparts do.

Those who are looking to bring greater diversification to their equity holdings might be surprised to discover that the mid-cap universe is brimming with companies whose products are part of their everyday lives.

1. Enjoy a meal from the dominant player in the pizza-delivery market.

Domino’s, which collects much of its revenue from fees paid by franchisees, continues to expand its footprint. Over the past five years, the number of Domino’s restaurants in the US rose from 6,800 to 7,500. The increase internationally was even more dramatic, rising from 13,400 to 18,500. The upward trajectory is expected to continue over the long term with the US market potentially reaching 8,500 stores and global markets hitting 40,000.

Pizza never goes out of style. Every year, Americans eat more than 3 billion pizzas. Domino’s benefits not only from the demand for the pies that have become a staple of the American and global diet. It also realizes revenue gains from the enhancements it has made to its digital ordering platform, the channel through which 70% of its orders are now placed. While cars with the Domino’s sign on their roofs are a familiar site in cities and towns across the country and around the globe, the company has also successfully forged partnerships with third-party delivery services like Uber Eats.

2. Take a swim in your or a friend’s well-maintained pool.

The United States has 10.7 million pools, and the Pool Corporation has a 30% share of the market for the products that keep those pools clean and operating smoothly. The top three US manufacturers of equipment for pools sell their products through Pool Corp. While the company also constructs new pools, 80% of its business comes in the aftermarket of servicing existing pools. Given that many of the existing pools were built during the U.S. housing boom of 2000 to 2006, many are now 20 years old and in need of remodeling with the products Pool Corp. provides. All that activity delivers a steady stream of revenue for a firm that enjoys a healthy profit margin on the products and services it provides.

3. Share a recipe or photos of a new outfit or home renovation project online.

Social media sites often experience a plateau, as their growth in users and engagement levels eventually flattens out. But Pinterest -- the site where people post photos of their pets, home décor, craftwork or favorite foods – has found ways to grow that aren’t entirely dependent on attracting more visitors to its platform. The site is learning more effective ways to monetize its platform, which is the fifth most popular social commerce site, with 450 million active users globally. It has established an ad revenue partnership with Amazon and additional, similar partnerships are in the works. A key benefit of the site to advertisers is that its users, who are often frequent travelers or engaged in home renovations, are highly motivated buyers of products related to their favorite pastimes. It’s another misperception that the site primarily caters to suburban moms. Gen Z is now the fastest-growing demographic on the site. The company is also incentivizing users to post more videos, given that many video creators develop serialized content that invites frequent recurring visits. The site is also expanding into Latin America and Asia, while also looking for more ways to monetize the engagement of users across these regions.

4. Order from your company cafeteria or the food vendors at your favorite sports venue.

Anyone who’s ever eaten a hot dog at a baseball game or chicken wings or barbecue in a football stadium has probably been a customer of Aramark. While well known for its operations in major sporting venues across the United States, the company is also a supplier of food to colleges and universities, public schools, hospitals, senior living facilities and businesses. In fact, Aramark provides food services to 89% of the Fortune 500 companies. The firm’s exceptional food quality and service delivery enables it to maintain customer loyalty. Every year, it retains about 95% of its business relationships. The firm constantly searches for ways to improve efficiencies and enhance its profit margins. A healthy economy and a lingering fatigue from all the at-home meals people consumed during the pandemic could keep demand strong for the full range of away-from-home eating options that Aramark offers.

Staying on familiar ground

Clearly moving down the capitalization spectrum doesn’t force investors to venture into unfamiliar territory. The mid-cap universe offers plenty of opportunities to observe the dictum of owning the stock of businesses everyone knows and regularly uses.

Important Information

The sectors and securities mentioned are provided for illustrative purposes only and should not be interpreted as a recommendation to buy or sell any security or invest in any asset class mentioned.

All investments, domestic and foreign, involve risks including the risk of possible loss of principal. The market value of the portfolio may decline as a result of a number of factors, including adverse economic and market conditions, prospects of stocks in the portfolio, changing interest rates, and real or perceived adverse competitive industry conditions. Investments in small and medium capitalization companies generally carry a greater risk than is customarily associated with larger capitalization companies, which may include, for example, less public information, more limited financial resources and product lines, greater volatility, higher risk of failure than larger companies and less liquidity.

The views shared are those of the Schroders investment team. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice. Information herein has been obtained from sources we believe to be reliable but Schroders Plc does not warrant its completeness or accuracy. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and / or strategic decisions. The opinions stated in this document include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized. Past performance is no guarantee of future results.

Schroder Investment Management North America Inc. (“SIMNA Inc.”) is registered as an investment adviser, CRD Number 105820, with the US Securities and Exchange Commission and as a Portfolio Manager, NRD Number 12130, with the securities regulatory authorities in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan. It provides asset management products and services to clients in the United States and Canada. Schroder Fund Advisors LLC (“SFA”) markets certain investment vehicles for which SIMNA Inc. is an investment adviser. SFA is a wholly-owned subsidiary of SIMNA Inc. and is registered as a limited purpose broker-dealer with the Financial Industry Regulatory Authority and as an Exempt Market Dealer with the securities regulatory authorities in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Quebec, and Saskatchewan. This document does not purport to provide investment advice and the information contained in this material is for informational purposes and not to engage in trading activities. It does not purport to describe the business or affairs of any issuer and is not being provided for delivery to or review by any prospective purchaser so as to assist the prospective purchaser to make an investment decision in respect of securities being sold in a distribution. SIMNA Inc. and SFA are wholly-owned subsidiaries of Schroders plc, a UK public company with shares listed on the London Stock Exchange. Further information about Schroders can be found at www.schroders.com/us or www.schroders.com/ca.

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