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Mid-cap tech stocks are heating up

By Jane Edmondson

The Russell Midcap Index (RMCC) gained nearly 3% in December, ending the fourth quarter with an 8.4% gain, trailing small and large cap. According to BofA Merrill Lynch quantitative research, 2013 marked the fourth-best year for mid caps, topped only in 1991, 2009, and 2003. Midcaps ended the year in the middle of the pack with the Russell Midcap Index gaining 34.8%, ahead of large Russell 1000 (RUI) at 33.1% and behind small Russell 2000 (RUT) at 38.8%.

Technology stocks were the best performing mid-cap stocks in December, followed by materials and producer durables. Energy, financial services, and consumer discretionary stocks were also strong performers in December. For the fourth quarter, financial services, producer durables, and consumer discretionary were the biggest winners. Smaller capitalization names dominated this year, as did non-earners and lower quality names.

EQM Capital's Mid Cap Quant portfolio outpaced its benchmark, the S&P 400 Midcap Index (MID), in December. One of the top-performing names for the portfolio in December was Groupon (GRPN).

GRPN Chart

GRPN data by YCharts

This has been a turnaround year for the company, firing its founding CEO in favor of more seasoned leadership. Gross bookings have continued to show improvement this year helping the e-commerce daily deals leader to become consistently profitable on an adjusted basis.

The number of active customers purchasing Groupon's over the last year has increased and the average spend has also risen to $137. Groupon was one of last year's biggest performance losers, falling well below its 2011 IPO price of $20 share. In 2013 it has successfully transformed itself into one of this year's biggest winners.

Another top performer in the month of December was digital image e-retailer Shutterstock (SSTK), which advanced almost 20%. In my opinion, the company's technologically superior online marketplace for stock photography and images is gaining market share as it benefits from the advertising shift to online marketing. It also has several other growth catalysts such as video offerings, enterprise, international expansion, and a partnership with Facebook.

SSTK Chart

SSTK data by YCharts

Another portfolio holding having a great month was factory automation company Cognex (CGNX). The company is seeing improving growth prospects driven in part by its fast-growing ID-code reader products business. It is also expected to benefit from an improving global economic outlook and increased capital spending in the coming year.

CGNX Chart

CGNX data by YCharts

One negative performer for the month was FleetCor Technologies (FLT), a provider of fuel cards to trucking companies and commercial vehicle fleets. There was no fundamental news to account for the decline, but the stock was a top performer in 2013. The month end decline was likely due to profit taking. The stock continues to score well on investment model characteristics and remains a holding in the portfolio.

FLT Chart

FLT data by YCharts

Coming off of a record year for the stock market, it is likely that investor caution will be on the rise this year. The Fed has begun tapering, but the liquidity tap is still on and recent data suggests signs of economic improvement. Most equity strategists believe 2014 will be a good year for the market, but not a great year.

According to S&P Capital IQ, if the market follows history, on average the market rose 10% after a great year of 20% gains or more. In an environment of heightened market uncertainty, mid cap stocks bridging the gap between large and small caps are often perceived as safer middle ground to investors. This trend bodes well for mid-cap stock investing in the coming year.

DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
Jane Edmondson

Jane Edmondson

I am Jane Edmondson, Founder of EQM Capital, a San Diego-based registered investment advisory firm that uses a data-driven approach

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