3 Compelling 'Mid Caps' that are Larger than One-Fifth of S&P 500 Components

While we categorize stocks into convenient large, mid, and small buckets, there is plenty of overlap. For instance, some mid-caps can grow to become bigger than their large-cap counterparts. While there is more to index membership than market capitalization, market price movements can result in some dramatic swings in equity values.

In the commonly used S&P 500 benchmark, there are currently 100 companies with a market cap under $10.5 billion. Its mid-cap cousin, the S&P 400, now contains 16 stocks that boast market caps above that level.

Many investors view mid-cap stocks as the 'sweet spot'. These companies are smaller but not too small. Many have comparable fundamentals to their larger-cap peers and their smaller size makes them nimbler to achieve higher growth than some more stodgy, mature large caps.

The mid-caps of today often become the large caps of tomorrow. Let's take a look at a few of those 'sweet 16' mid-caps that have interesting growth stories—and could someday be called up to the major leagues.

Is Etsy Limited to a Niche Market?

Etsy (NASDAQ:ETSY) is a $13.5 billion company that has seen its stock surge 173% this year. The online retailer of crafts and jewelry has been one of the major beneficiaries of the 'stay at home' economy.

Its unique platform connects 3 million-plus entrepreneurs from all over the world with some 60 million buyers of handcrafted goods. Approximately 4 million Etsy visitors alone bought custom protective masks last quarter.

Buyers flock to Etsy for more than just PPE. Etsy offers things you simply can't find in stores or other online outlets. A modern take on the flea market, the company has harnessed a niche, but very large market that has room to grow. Etsy estimates that it holds about a 5% share of the highly fragmented $100 billion global specialty retail market.

But don't tell Etsy it participates in a niche market. The company also considers itself part of a broader $1.7 trillion global retail market. This means it aspires to expand into other areas of retail in the coming years.

A big factor in Etsy's ability to grow into the retail space will be its ability to capture repeat purchases. Nearly three-fifths of Etsy buyers shop there just once a year. Marketing investments geared towards transforming the business from a novelty storefront to a place where customers are regulars will be a key theme for investors to watch. Streaming TV advertising and social media outlets will be critical means of engaging new and existing customers as Etsy looks to enter its next phase of growth.

What will Power Growth at Generac?

Turning our attention to another high flying mid-cap, Generac (NYSE:GNRC) is a stock that has advanced 83% year-to-date bringing its valuation to $11 billion. As the name suggests, it is a maker of backup power generators for the residential, commercial, and industrial markets. In addition to its core generator business it offers mobile power products inlcuding light towers, heaters, and pumps as well as outdoor consumer products like lawnmowers, pressure washers, and log splitters.

In the past decade, the company has quietly generated some impressive growth. Since its 2010 IPO, Generac has delivered organic sales growth of 10%. A series of valued added acquisitions have complemented this growth. With a network of thousands of dealers, wholesalers, and e-commerce partners, Generac notched a 21% adjusted EBITDA margin in fiscal 2019—and is forecasting an expansion of this profitability metric to 21.5% to 22% in 2020.

Generac doesn't just pray for power outages to drive demand for its products. It stands to benefit from several global energy trends. An increasing worldwide focus on clean energy solutions is expected to drive sustained demand for the company's technology-driven power products. Meanwhile, the worldwide deployment of 5G networking also falls into Generac's wheelhouse because telecommunications companies will need power solutions to build their 5G infrastructure especially in remote, rural areas. A need for infrastructure upgrades in transportation and water systems in the U.S. and internationally represents another multi-decade tailwind for Generac.

On the consumer end of the business Generac is well positioned to build off its nearly 30% market share in the U.S. portable generator market. It estimates that less than 5% of addressable households own a standby generator—and every 1% of market penetration represents a $2.5 billion retail opportunity. As the underinvested domestic utility grid continues to age and power outages rise, Generac should continue to gain share and see its stock power higher.

Why is Boston Beer Stock Doing Well?

Last but not least, we wash things down with Boston Beer Company (NYSE:SAM). The $10.6 billion brewer has been a somewhat surprising winner in 2020. Despite restaurant and bar closures, the company has thrived.

Boston Beer stock has more than doubled year-to-date propelled by its second-quarter performance that handily beat on the top and bottom lines.

Consumer demand at grocery and liquor store outlets has been strong during the pandemic. Apparently, beer has been among the many items that shoppers have hoarded. Aside from their favorite Sam Adams and Dogfish Head brews, consumers have taken a liking to Boston Beer's non-beer offerings like Twisted Tea, Truly Hard Seltzer, and Angry Orchard hard cider.

You wouldn't know the economy is in a recession by Boston Beer's growth. In fact, in 2020, sales and earnings growth are expected to be the best they've been in years at 34% and 29%, respectively. Earnings growth is expected to accelerate in 2021.

As the pandemic continues into the fall and winter months, expect continued stockpiling purchases and takeout demand from consumers. And when economic conditions normalize and Boston Beer's on-premise channels are back up to speed, look for its sales to continue chugging higher. Although stockpiling and home drinking will undoubtedly slow, the company's diversified portfolio of popular beers, malt beverages, and ciders should continue to serve up strong growth in any economic environment.