Editors' Pick: Originally published Dec. 30.
Risk-averse investors often flock to large-cap stock holdings for safety and stability, but mid-cap and small-cap stocks can provide return-friendly diversification.
Mid-cap stocks combine attributes of both large and small companies. Similar to large companies, these mid-size companies can have seasoned management teams, a strong market presence and access to capital markets, for instance. They can also grow quickly, with fewer layers of management and bureaucracy, and offer a more entrepreneurial spirit than large competitors, according to TIAA-CREF.
Small-cap stocks have their advantages too, says Morningstar. The stocks have potential to deliver high returns, but investors must also be patient with small-cap stocks that tend to be volatile as they grow (and possibly endure setbacks) and adjust to market sentiment (and being a public company).
Both mid-cap and small-cap companies can also be potential takeout targets to larger competitors, another possible reason for owning the stocks.
The proof is in the pudding for these 13 buy-rated stocks.
The companies on this list all have market capitalizations below $5 billion and are rated "Buy, A+" by TheStreet Ratings, TheStreet's proprietary ratings tool. To drill down even further, these companies were also identified as having high growth and high total returns, with each garnering five out of five stars in those categories from TheStreet Ratings.
TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equity market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014, beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Here's the list of mid-cap stocks to buy. When you're done be sure to check out Jefferies' 17 favorite U.S. stocks.