NEW YORK (TheStreet) -- Mid-cap tech companies can be risky investments. Compared to their larger cousins they have less capital, which means less financial resources to deal with economic shocks. Less capital also means they have lower access to equity and debt markets. Also, they are less diversified companies and are limited in the number of products or services they sell. Finally, they have fewer shares outstanding and it takes a small volume of buy or sell orders to have big changes in the stock price, which leads to higher volatility.

Yet, their shares have potentially higher returns, unlike large-cap companies. If a $1.5 billion mid-cap company gains $500 million in market cap, investors have made a 33% return; if a $15 billion large-cap company does the same, investors only get a 3.3% return.

Mid-caps also have lower operational risk compared to small-cap companies (which also have high potential returns). Also, they are easier to manage, quick to adapt to market changes, they know the markets they sell to, and help investors diversify their portfolios. If mid-cap companies have good management, they can be good bets to make.

So what are the best mid-cap tech companies investors should buy? Here are the top three in the application software sub-sector, according to TheStreet Ratings, TheStreet's proprietary ratings tool. Companies in application software sub-sector develops or licenses electronic technologies.

TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points,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 equities 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.

Check out which three mid-cap tech companies made the list. And when you're done be sure to read about which telecom stocks to buy now. Year-to-date returns are based on April 22, 2015 closing prices. The highest-rated stock appears last -- read more to see which one is No. 1.

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TYPE

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3. Monotype Imaging Holdings Inc. 

(TYPE) - Get Report


Rating: Buy, A+
Market Cap: $1.3 billion
Year-to-date return: 15%

Monotype Imaging Holdings Inc. develops, markets, and licenses technologies and fonts in the United States, the United Kingdom, Germany, Japan, and rest of Asia.

"We rate MONOTYPE IMAGING HOLDINGS (TYPE) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, increase in net income, revenue growth and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • MONOTYPE IMAGING HOLDINGS has improved earnings per share by 15.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, MONOTYPE IMAGING HOLDINGS increased its bottom line by earning $0.80 versus $0.78 in the prior year. This year, the market expects an improvement in earnings ($1.16 versus $0.80).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Software industry. The net income increased by 15.8% when compared to the same quarter one year prior, going from $8.09 million to $9.37 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 9.9%. Since the same quarter one year prior, revenues slightly increased by 7.8%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • TYPE has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 3.05, which clearly demonstrates the ability to cover short-term cash needs.

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MENT

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2. Mentor Graphics Corp. 

(MENT)


Rating: Buy, A+
Market Cap: $2.9 billion
Year-to-date return: 13.1%

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to automate the design, analysis, and testing of electro-mechanical systems, electronic hardware, and embedded systems software.

"We rate MENTOR GRAPHICS CORP (MENT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its increase in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels and expanding profit margins. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Software industry average. The net income increased by 8.5% when compared to the same quarter one year prior, going from $105.54 million to $114.49 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 9.9%. Since the same quarter one year prior, revenues slightly increased by 9.5%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • MENT's debt-to-equity ratio is very low at 0.19 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, MENT has a quick ratio of 1.81, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
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NICE

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1. Nice Systems Ltd.

(NICE) - Get Report


Rating: Buy, A+
Market Cap: $3.6 billion
Year-to-date return: 19.5%

NICE Systems Ltd. provides software solutions that enable enterprises and security-sensitive organizations to prevent financial crimes and fraud, ensure security and public safety, and provide enhanced customer experiences.

"We rate NICE SYSTEMS LTD (NICE) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and largely solid financial position with reasonable debt levels by most measures. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Powered by its strong earnings growth of 112.82% and other important driving factors, this stock has surged by 29.64% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, NICE should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • NICE SYSTEMS LTD reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, NICE SYSTEMS LTD increased its bottom line by earning $1.70 versus $0.89 in the prior year. This year, the market expects an improvement in earnings ($3.13 versus $1.70).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Software industry. The net income increased by 106.8% when compared to the same quarter one year prior, rising from $24.22 million to $50.08 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 9.9%. Since the same quarter one year prior, revenues slightly increased by 8.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • NICE has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.15, which illustrates the ability to avoid short-term cash problems.

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