Stock Market Analysis: Colder Winter for Midsize Companies

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When the Covid-19 hit, a record number of companies, many already existing for more than 50 years, had no other options but to file for bankruptcy. Many of those companies are midsize companies.


Before I show some numbers as evidence, let me first give a definition of big / midsize / small companies. Considering the U.S. stock exchanges by market value, the top 30% and bottom 30% are big and small companies, while the middle 40% are midsize companies.


Data suggests that a storm has been brewing for midsize companies over the past 50 years. In every successive decade since 1970~1979, the annual growth rates of assets, sales and profits have been declining for midsize companies.


Sales is the top-line number in income statements and indicates the market size for the company’s products and services. Sales growth indicates whether the company’s business is growing or declining. Asset growth shows whether the company is increasing or decreasing its total resource deployment. Profits is the bottom-line number in income statements and shows whether the company is generating a net surplus in its operations. The surplus is used to finance further growth and pay dividends to shareholders.


In terms of sales, assets and profits, the average growth rate for midsize companies in the U.S. kept declining for the past 3 decades.

  • For average sales, the number was 13% in the 1970s, 10% in the 1980s, 11% in 1990s, 8% again in the 2000s, and finally 7 % in the 2010s.
  • For average assets, the number was 10% in the 1970s, 8% in the 1980s, 7% in 1990s, 5% again in the 2000s, and finally 4 % in the 2010s.
  • For average profits, the number was 16% in the 1970s, 6% in the 1980s, 8% in 1990s, 6% again in the 2000s, and finally 5 % in the 2010s.

As can be observed, the growth rate in each of the 3 measures has declined over the past 50 years and was lowest during the 2010s, despite that period is believed as a decade of economic recovery. This last decade showed rising population, decreasing interest rates, growth in the hourly wage and household income, improving education attainment, and growing GDP. One would expect those factors to have enabled rapid growth for corporations, yet such growth seems to have bypassed the midsize companies.


Why are midsize companies facing difficulties despite the overall economy is good?


It’s not easy to pinpoint the exact reason why midsize companies haven’t benefited from the past decade’s economic progress, but we do have some hypotheses.


One plausible reason is that businesses that could scale their virtual operations without the need for physical assets benefited the most from technological progress and economic conditions. As a result, digital disruptors like Amazon, Airbnb and Uber ate into the growth and margins of midsize companies’ business. Amazon needed large infrastructures, but it could integrate across physical and virtual platforms seamlessly, disrupting many businesses simultaneously. In contrast, midsize companies, especially those like hotel chains and retail stores that operate with physical assets and infrastructure, lacked not only the dynamism of small companies but also the R&D investment and scaling capabilities of large companies. Furthermore, the last decade was a winner takes-all-economy, with large companies like Amazon and Apple getting even bigger. 


Simply put, big companies are killing midsize companies.


During the 2010~2019 period, 39,8% of midsize companies reported a loss, 33% reported year-on-year decreases in sales, and 47% reported declines in annual profit. The average earning-to-price ratio was negative 3.86%. The average return on assets was also negative 2.36%. The median change in return on equity was negative 4.04%. These results indicate that midsize companies increasingly struggled in the last decade despite the stable and growth-conducive economic conditions.


In 2020, the cold winter became even colder for midsize companies.


Although some midsize companies haven’t released their annual report for 2020 yet, the result is expected to be bad, very bad. 


Another financial distress indicator, the number of bankruptcies filed by midsize companies, has spiked in 2020. To illustrate, during the 2010~2019 period, the average number of bankruptcies filed every year is 13.2 on average. But in 2020, this number was 43. This  is a 226% increase from the annual average! 


The bankrupt companies in 2020 include well-known retail stores like J.C. Penney, Pier 1 Imports, Tailored Brands and Ascena Retail. The other large industry groups filing for bankruptcy include oil and gas companies, such as Gulfport Energy, and travel corporations, such as Hertz. Bankruptcy filings would have been even higher if not for the U.S. government’s $2.2 trillion dollar stimulus plan, which included $500 billion earmarked for public corporations.


In summary, despite its low interest rates and stable economic environment, the most recent decade witnessed the slowest growth among midsize companies and a continual deterioration of their financial performance. The U.S. stock market may seem booming right now, but the midsize companies are starving. And this will continue.