[ad_1] The post 3 Mid-Cap Stocks for the Market’s Bad Breadth appeared first on Millennial Money. With the stock market notching so many record highs this year, you might think that it’s in perfect health. But when we give it a check-up, we can see that it’s not quite as healthy as it seems. In fact, I think we could safely diagnose the stock market with a case of increasingly bad breadth. Funny term, serious implications It sounds like halitosis, but market breadth (not breath) can often be used to determine the health of the broader market. The problem with simply using index returns — like the record-high-setting S&P 500 — as a proxy for the health of the entire stock market is because of a quirk in their compositions. The S&P 500 and Nasdaq Composite are both market-cap weighted indices, which means that larger companies account for a disproportionate amount of the index’s return. Here’s an example. Below are the weights of the top five companies in both the S&P 500 and the Nasdaq, along with their representative weights in each index. Companies S&P 500: Weight Nasdaq 100: Weight Apple 6.2% 11.3% Microsoft 5.9% 10.1% Alphabet 4.5% 8.1% Amazon 3.9% 7.8% Facebook 2.4% 4.1% Total 22.9% 41.4% Source: Slickcharts. Alphabet includes both A and C-class shares. You can see how the major indexes are becoming dominated by the performance of just a few companies. Think about it — for the Nasdaq 100, more than 40% of its daily returns are based on just those five tech giants! Other big companies aren’t performing as well as those five, but their underperformance is getting obscured by the strong performance of Big Tech. Even more worrisome is that many of these tech companies are now trading at elevated valuations, which means investors have high expectations for their business performance. It seems like Big Tech is priced for perfection … and if/when those companies disappoint investors, it will affect the entire index. If you’re only invested in big tech companies — or in an index fund that tracks the S&P 500 — there are some ways you can protect your money from a Big Tech crash. Investing in mid-cap stocks is one way. What’s a mid-cap stock? The definition for a mid-cap (or small-cap or even a large-cap) stock is often a source of debate. Back in the 1980s, any company with a market capitalization of more than $1 billion was considered a large-cap stock. These days, it’s more like $10 billion to $25 billion. And today’s small caps are generally regarded as having a market capitalization of less than $1 billion to $2 billion. So most market watchers consider mid-caps companies to be the ones with market capitalizations between $1 billion and $10 billion. Why you should invest in mid caps Depending on how big a company is, its investors will be exposed to different levels of risk and potential return. Traditionally, investing in large-cap companies has been considered less risky and less volatile because they have many assets and are vital to the global economy. However, investing in large caps traditionally required a trade-off: It was widely accepted that investors needed to sacrifice growth for that stability. (Big Tech has mostly rewritten the rules here because those companies have been able to profitably scale at tremendous levels. Investors continue to reward these tech titans, and now their valuations are at record highs. And therein lies the risk. At some point, Big Tech will eventually be unable to grow into those lofty valuations. Slowing growth and rich valuations could lead to sharp selloffs, which will impact the greater market because of their disproportionate representation in the indices.) Small caps have the exact opposite risk and return profile. Small-cap companies, like many Big Tech stocks of yesteryear, have tremendous potential for mind-boggling growth. However, small-cap investing is much riskier. In fact, buying shares of many micro-cap companies (aka penny stocks) is more like gambling than investing because these companies usually have no profit — many don’t even have a viable business model. Even if a smaller company is profitable, it can quickly fail if larger companies move into its business, suppliers raise prices, or customers abandon its limited products. Mid caps exist in a sweet spot between these two extremes. These companies often have a history of performance and growth (like large-cap companies), have high-quality management teams that have executed on their business models, and have strong future growth potential (like small-cap stocks). Here’s the deal: Great mid-cap stocks offer you a combination of stability and growth. And these three are well situated to eventually grow into large-cap stocks. Innovative Industrial Properties To complicate things even further, the first mid-cap company isn’t even a stock. Innovative Industrial Properties (NYSE: IIPR) describes itself as the leading provider of real estate capital for the medical-use cannabis industry. In other words, it’s a landlord to weed growers. IIPR shares have been on fire and are now worth more than 10 times its IPO price of $20 per share. And yet it’s still just a $6 billion company, which gives it ample opportunity to keep expanding. Like all investments, Innovative Industrial Properties has risks. Despite wide approval for medical marijuana from voters and increased state legalization, marijuana remains an illegal narcotic in the eyes of the federal government. Counterintuitively, marijuana’s semi-legal status works well for Innovative Industrial Properties. Right now, the company doesn’t have to compete with banks and other large capital providers that are afraid of running afoul of federal laws. At the same time, its reputation as a medical marijuana REIT (real estate investment trust) has allowed it to operate with little interference from federal entities, regardless of which party is in control. (Technically, Innovative Industrial Properties is a REIT. These are publicly traded investment vehicles that own, manage, and operate real estate with the goal to return income to shareholders. Per law, REITs must return 90% of taxable income to shareholders.) Because it
