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5 Mid-Cap Stocks That May Outperform in 2012 and Beyond

Story updated with performance of mid-cap stocks to S&P 500

BOSTON ( TheStreet) -- Investment managers have herded Americans into dividend-paying stocks and Treasuries as Europe's debt crisis grips the world. Mark Schultz, in contrast, says now's the time to take advantage of the low prices of companies with plenty of room to grow.

Schultz, manager of the MTB Mid-Cap Growth Fund (AMCRX), says investors are letting fear dictate their decisions. The perception is that some bonds are trading near record highs even as some stocks have been overbought, though investors irrationally continue to buy large-company shares. Schultz, however, says stocks are, on some indicators, at very attractive valuations.

"When investors become risk-averse, they want their cash here and now," Schultz says. "You get these flight-to-safety plays" in which utilities, telecom services and consumer staples outperform other sectors.

However, Schultz questions why investors are willing to pay so much for companies in those sectors when their growth profiles are getting worse.

"Utilities is forecast to have declining year-over-year earnings," Schultz says. "It's one of the few sectors that is trading near the peak of its historical multiple. I understand why some of this happens, but it is a real triumph of emotion over reason."

Schultz says mid-cap companies also are attractive because they have years of growth ahead of them, unlike some large-caps that start sinking under their own weight. The mid-cap space includes a lot of companies with a long runway ahead of them with less risk than small-cap stocks, he says.

This year, mid-cap growth stocks have struggled compared to their larger-cap counterparts. The Russell 2000 Growth Index is down 3% in 2011. The Russell Mid-Cap Growth Index, meanwhile, is lower by 1.6% this year. The S&P 500, which includes the largest companies in the U.S. by market cap, is essentially flat.

Schultz's strategy has done well for fund investors. Over the past one, three and five years, the MTB Mid-Cap Growth Fund has annualized returns that outpace the benchmark Russell Mid-Cap Growth Index. A $10,000 investment in the fund made 10 years ago would be worth $18,700 today, compared to $14,700 for the mid-cap growth category and $13,200 on the broader S&P 500 Index of the largest companies in the U.S.

"Our strategy is very consistent and has been for years, through every market environment," Schultz says of his fund's success.

For investors looking to add a little more risk exposure to their portfolios for 2012, Schultz offers five stocks in his fund that he expects to outperform in 2012 and beyond. Those picks are detailed below and on the following pages.


Lufkin Industries (LUFK)

Company Profile: Lufkin Industries makes pumping units used to lift oil from wells.

Market Cap: $2.1 billion

Share Price: $70.87 (Dec. 7)

Schultz's View: Schultz says that oil field services is a very good place for investors to be looking for mid-cap stocks of companies with lots of growth. He says he has been hearing from companies that capital expenditure is looking very solid. That has led him to Lufkin, which he says still has a long runway for growth in the U.S. ahead of it.

"When oil and now gas wells are drilled, the initial production is brought to the surface by natural pressure," Schultz says. "When the natural pressure of the fields dissipates, the company will deploy artificial lifts to bring the resource to the surface. We expect that Lufkin will benefit as these wells mature and there is a need for the artificial lifts. There is a very strong secular trend because of the number of wells being drilled."

Schultz says that the company also sells its products internationally, even though the focus is on the U.S. He adds that the stock's valuation is very reasonable, even as the stock has climbed 13% this year. "It was an undiscovered gem when we first bought it, but we continue to hold it," he says.

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