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Eight MidCap 50 stocks that consistently beat the market

Eight MidCap 50 stocks that consistently beat the market

Domino's Pizza, ResMed, TPG, Carsales and four other MidCap 50 stocks have something in common - performance.

The S&P/ASX MidCap 50 index, consisting of companies in the S&P/ASX 100 index that are ranked 51 to 100 in terms of market capitalisation, has outperformed major stock indices in Australia since 2014.

The MidCap 50 index hit 5,619.9 on May 30, the highest close in eight years, while also recording a historic high shareholder return on the same day, according to Bloomberg data.

While the nation’s 20 largest companies – including banks and miners – posted negative returns of -1.4% last calendar year and -4.9% this year up to July 8, the MidCap 50 members delivered total returns of +11.3% and +8.8%, respectively.

MidCap 50 performance might appear relatively more appealing in a prolonged low-interest rate environment.

Total returns of key ASX indices - 2012 to 2016 up to July 8

 INDEX 2016 YTD 2015 2014 2013 2012

S&P/ASX 20

-4.94% -1.37% +5.33% +23.25% +23.17%

S&P/ASX 50

-0.85% +0.99% +5.32% +22.09% +22.02%

S&P/ASX 100

+0.35% +2.14% +6.13% +21.54% +21%

S&P/ASX 200

+1.04% +2.56% +5.61% +20.2% +20.26%

All Ordinaries

+1.66% +3.78% +5.02% +19.66% +18.84%

S&P/ASX MidCap 50

+8.82% +11.3% +13.19% +16.84% +12.78%

Past performance is not a reliable indicator of future performance. Data retrieved after close of trading on July 8, 2016. Source: Bloomberg

Outperforming stocks

Shareholder return includes both share price movement and any dividends paid, assuming that all dividends are reinvested. This gives investors a clearer idea of what their total profit or loss would have been over a certain period.

The All Ordinaries Accumulation Index (AOAI) provides a better picture of the broader market’s performance, as the gauge tracks share price changes and dividend payments, assuming reinvested, of the 500 largest companies listed on the Australian Securities Exchange (ASX).

Against the AOAI, returns from the MidCap 50 index have also fared better in the past 2.5 years.

In particular, eight mid-cap stocks have consistently beaten the broader market since 2012, as shown in the table below.

Total returns of eight MidCap 50 stocks vs the All Ordinaries Index - 2012 to 2016 up to July 8

INDEX/COMPANY 2016 YTD 2015 2014 2013 2012

All Ordinaries Accumulation

+1.66% +3.78% +5.02% +19.66% +18.84%

ResMed

+16% +9.38% +33.75% +36.87% +60.92%

TPG Telecom

+20.69% +48.19% +28.74% +109.6% +100.1%

Aristocrat Leisure

+33.94% +58.73% +43.74% +53.84% +48.39%

REA Group

+12.39% +23.36% +21.58% +112.54% +47.19%

Domino's Pizza Enterprises

+16.24% +132.36% +58.35% +64.91% +39.8%

AusNet Services

+12.75% +18.27% +13.54% +20.05% +28.98%

Vocus Communications

+15.35% +19.17% +83.55% +93.74% +31.52%

Carsales.com

+6.74% +16.13% +5.56% +42.77% +61.26%

Past performance is not a reliable indicator of future performance. Companies are in descending order in terms of market capitalisation. Data retrieved after close of trading on July 8, 2016. Source: Bloomberg

Portfolio diversification

CommSec chief economist Craig James wrote in a note in late May that one of the interesting characteristics of the MidCap 50 index is its diversity, not just the industries these companies operate in, but also their market size.

James said “investors need to cast their nets wider to ensure they have a suitably diverse portfolio of assets that will provide adequate returns over the longer term”, as the general outlook remains “cloudy” for banks and resources companies.

For the purpose of diversification, the MidCap 50 companies may provide a good starting point to assess the prospects of companies of various sizes across several sectors.

The above-mentioned eight outperforming stocks, for example, belong to five different sectors within the benchmark ASX 200 index, as well as diverse sub-sectors.

It should be noted that past performance is not a reliable indicator of future performance.

Sectors and stocks

MidCap 50 consumer discretionary companies took three of the eight spots of consistently higher shareholder returns compared to the AOAI.

Shares in Aristocrat Leisure (ASX: ALL) offered a return of 34% this year up to July 8, after delivering 44%-59% from 2012 to 2015.

The gaming group, which operates in 90 countries around the world, lifted its interim dividend by 25% after half-year earnings soared. Historical underlying annual profits, which excluded significant items, had been on a steady rise, according to the company’s five-year summary in its 2015 annual report.

Meanwhile, online property advertising company REA Group (ASX: REA) and Domino’s Pizza Enterprises (ASX: DMP) have been in expansion mode.

REA completed the acquisitions of iProperty and Flatmates earlier this year, while Domino’s broadened its footprint in Europe with purchases of pizza chains in France and Germany.

In the telecommunication services sector, shares in TPG Telecom (ASX: TPM) returned more than 20% so far in 2016 compared to the AOAI’s 1.7%.

TPG shareholders received 27% more interim dividend for the six months ended January 31, after the company’s net profit after tax (NPAT) jumped 90%.

TPG's takeover of rival internet service provider (ISP) iiNet in late 2015 created Australia's second-largest ISP, behind Telstra.

Latest earnings at Vocus Communications (ASX: VOC), which is partly owned by TPG, were also outstanding. Its underlying NPAT for the half year to December 31 surged 203%, driven by both organic growth and acquisition.

Vocus, which became a new member of the ASX 100 index in March, is seeking to raise $652m to fund its acquisition and development plans.

ResMed (ASX: RMD), which sells devices that treat sleep apnoea, was the only healthcare company among the eight stocks. Its total return stood at 16% this year up to July 8.

Despite reporting a marginal decline in first-half statutory net profit, ResMed raised its interim dividend by 7.1%. The group will release its full-year results on July 28.

AusNet Services (ASX: AST) and Carsales.com (ASX: CAR) led the utilities and information technology sectors, respectively, in terms of consistent total returns.

AusNet, Victoria’s largest energy distributor, expects dividend in the 2017 financial year to increase 2% as it grows high-performing businesses.

As for Carsales.com, the provider of online automotive classifieds expanded into Chile in March, in addition to increasing its exposure to the Southeast Asian market through iCar Asia.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. The inclusion of companies in this article does not constitute a recommendation and it’s vital to remember that the value of shares in any company can fall as well as rise, which means you could lose money by investing in them. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.