By Ian Salisbury

With uncertainty over interest rates and stock valuations, 2025 could be the year for the market's forgotten middle-child: stocks with midsize market capitalizations.

While mid-caps don't get much attention, the sector -- generally defined as companies with market values between $2 billion and $10 billion -- may be in the sweet spot.

Large-caps, driven by highflying tech stocks, have had a great run. But the S&P 500 is now trading at close to 22 times next year's earnings, which is near a 20-year high. Small-caps look cheaper, but for good reason: in recent years, only about 60% of small-caps have managed to post profits, putting a drag on returns.

That contrast has set the stage for mid-caps. The iShares Core S&P Mid-Cap exchange-traded fund, a popular index fund that targets the sector, trades at just 16 times 2025 earnings, according to FactSet. Meanwhile, analysts forecast 2025 profit earnings per share growth of 13%, a solid figure, if not quite not matching the S&P 500's 14%.

It's "mid-cap's time to shine," wrote BofA Securities analysts Jill Carey and Nicolas Woods in a recent note, noting that midsize stocks, with comparatively strong balance sheets, should be better able to weather rising long-term interest rates than alternatives like small-caps.

J.P. Morgan is also bullish, pointing out in a note this week that President-elect Donald Trump's tariff agenda should give a lift to domestically-focused companies, advantaging both small- and mid-cap stocks relative to larger multinationals.

Among the stocks highlighted by J.P. Morgan's small and mid-cap strategy team: drug company Amphastar Pharmaceuticals, gold miner Dundee Precious Metals, and fruit company Dole.

Dole, which trades at just nine times 2025 earnings, is expected to post earning growth of about 15% this year, according to FactSet. J.P. Morgan touted the stocks's 12% free-cash-flow yield and "rapidly deleveraging balance sheet."

The $53 million Schwartz Value Focused fund was the top-performing mid-cap blend fund in Morningstar's database in 2024, with a 39% return. The fund has big bets on energy, including Texas Pacific Land Corp. and Devon Energy. It also owns consumer-oriented brands, such as water-bottle maker Yeti Holdings.

Yeti had a huge run-up after its 2018 initial public offering, then tumbled sharply in 2022 when sales growth leveled off. Schwartz Value co-manager Timothy Schwartz says the stock, which trades at just 13 times expected 2025 earnings, deserves another chance.

"Investors saw 30% growth and thought it would go on forever. When it didn't, they bailed," he told Barron's. Still, the company should deliver high-single- to low-double-digit-sales and earnings growth going forward, he thinks, making it attractive at today's price.

"It's overlooked by the market," he said.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 17, 2025 02:30 ET (07:30 GMT)

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