Mid-cap stocks have posted strong returns year-to-date, outpacing their smaller and larger cap counterparts. This was particularly the case in February with the Russell Midcap Index up 5.9% and the S&P 400 Index advancing 4.5%.
So what factors are driving returns? Earnings have been reasonably good in the mid-cap sector and valuations are less stretched than for many small cap names.
EQM Capital's Mid Cap Quant portfolio had a solid performance in February, and is now up 9.5% year-to-date on a net of fees basis. Identifying niche players with strong fundamentals has been the core driver of our outperformance.
Shutterstock (SSTK) was of the stocks in the Mid Cap Quant portfolio that had a good month in February. The online marketer of digital stock photography content beat quarterly earnings estimates and guided up earnings and revenue estimates for the year.
The company has a fast-growing collection of more than 33 million images and 1.5 million video clips, making it an online hub for image needs.
FleetCor Technologies (FLT) is another portfolio holding that had a great February. FleetCor, a provider of fuel cards and payment services, just reported a record year in which it closed seven acquisitions and signed six new partnership deals.
Credit card giants MasterCard and Visa are also executing well, in my view. But FleetCor is gaining investor notice as nice smaller cap alternative in the space. Again, this is another niche name identified by our model.
In my opinion, wireless equipment manufacturer Ubiquiti and apparel maker Kate Spade are defying the negative trends in their respective industries, gaining market share and delivering strong results despite seemingly adverse conditions.
Sometimes a timely sell trade can make your month. The portfolio sold local discount deal marketer Groupon (GRPN) before it reported earnings results.
The model identified weakening trends going into earnings. A weakening model score, coupled with our concerns about weather-related weakness in the space encouraged us to sell out of the position.
Finally, even a good month has a disappointing name in the portfolio. Portfolio holding Tyler Technologies (TYL) declined in February after missing earnings estimates by a penny. It also guided earnings and revenues below consensus.
Tyler provides IT management solutions for the public sector. The company has several new government contracts wins, so we are reserving our judgment on their disappointing results for now, but we are keeping an eye on the name as a possible sell in the future.
Looking forward, I believe that strong earnings and fundamentals continue to be rewarded by the market. I have no way of knowing this for sure, but we continue to find niche opportunities in the Mid Cap segment that are generating alpha relative to the benchmark.
DISCLAIMER: The investments discussed are held in client accounts as of February 28, 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.
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Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.
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