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Fate Of Mid-Cap Stock Funds

- Alan Lavine and Gail Liberman

Most experts expect "mid-cap" stocks, or stocks issued by medium-size companies, to perform well as our economy expands.

But some managers are looking for opportunities in larger companies with fast growing earnings.

Mid-cap stocks typically are classified as having a value, based on the company's stock traded on the stock exchanges, of between $1 billion and $10 billion.

They usually offer greater return potential than larger established firms and are less risky than small companies.

By contrast, "large-cap" stocks generally are valued at a minimum of $10 billion. Small-cap or small company stocks typically have a market capitalization of less than $1 billion. Definitions, though, may vary by brokerage firms.

"Mid-cap stocks are the fund's center of gravity, but we own small (company) and large company stocks if the valuations are attractive," said Chip Tucker, co-manager of Selected Special Shares. Mid-cap stocks still have legs, he believes, but there are values in larger companies with long-term growth potential.

Tucker says the fund has outperformed the broad market due to flexibility in owning large, medium and small stocks selling at reasonable prices in relation to long-term growth.

Recent purchases include: AutoZone, which is expected to grow earnings at double-digit rates; and, Sigma- Aldrich, a manufacturer of research chemicals with earnings growing at more than 10 percent.

David Wallack, manager of the T. Rowe Price Mid-Cap Value Fund, believes medium-size companies' profit margins, cash flow and balance sheets are strong.

"We continue to find good risk-reward candidates among mid-caps, but they are harder to come by than in previous years," he says.

Wallack says he is investing in companies that are out of favor, but show some type of catalyst for change. The fund's average holding is growing earnings at 12 percent annually. By investing in unpopular stocks, he says his fund should be less volatile than one investing in growth stocks. And once the fund's beaten-up pickings regain favor, the fund should profit.

That philosophy has put Wallack into stocks like SAFECO, which had financial problems a few years ago. New management sold off some unprofitable business lines and improved profitability.

Seventy percent of the fund's assets are in the financial, consumer, technology, business services and health care industries. Other ugly ducklings the fund owns include St. Paul Companies, Diamond Offshore Drilling and Genworth Financial.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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