<div id="readability-page-1"><div> By Tyra Pratt Midcap stocks can stand up to the market's megacap giants It's no secret that the U.S. stock market has become extremely concentrated. At the end of August, the top 10 companies in the S&amp;P 500 SPX made up almost 40% of the index. The market for midcap stocks has also been changing - growing beyond traditional definitions of companies with a capitalization between $2 billion and $10 billion. The Russell Midcap Index, for example, encompasses companies ranging from $1 billion to $104 billion in market capitalization, with a recent average of $30 billion. For investors looking to reduce concentration risk without adding excessive volatility, midcaps can offer a solution. Midcaps balance aspirational growth potential and stability: Midcaps have a trick up their sleeve. Having moved beyond the early-stage risk of concept validation, they are executing on proven business models. Yet they retain meaningful upside: market share to capture, scope for innovation and operational efficiencies to scale. This combination supports resilient fundamentals, with steady cash flows and a loyal customer base. Between 2007 and 2024, midcap stocks outperformed both large-cap and small-cap peers in revenue growth - with 5.9% annual growth compared with 4.3% and 5.6%, respectively. These are the kinds of fundamentals that help explain why midcaps have historically produced more attractive risk-adjusted returns than small-cap stocks. Looking ahead, many midcap companies are well-positioned to take advantage of developing AI technology to further support revenue growth with the track record to make timely investments and the management discipline and agility to make adoption possible. Midcaps trade at a discount relative to peers: Over the past 25 years, midcaps have traded at a modest premium to large caps (19.1 times vs. 18 times forward earnings). That premium now has evaporated, leaving midcaps trading at a discount. One clear driver for this reversal is the recent outsized performance of megacap stocks, which has skewed index valuations. Another is the current period of relatively higher interest rates, at least compared with the historic lows that followed the global financial crisis. As with small caps, higher interest rates disproportionately impact midcap borrowing costs compared with their larger counterparts, which generally have more flexibility in credit markets. And it's not just about fundamentals. On average, based on data from early September, close to 50% more analysts were covering S&amp;P 500 companies compared with companies in the Russell Midcap Index - 25 vs. 17 - and that leaves room for active investors to uncover bargains. Midcaps offer greater protection from geopolitical impacts: Structurally, midcap companies are less exposed to trade tensions compared with their large-cap peers. The reason is simple: that midcaps are anchored in U.S. consumer or business demand. Companies in the Russell Midcap Index generate 24% of revenues outside of the U.S., while S&amp;P 500 companies receive more than 40% of revenues from non-U.S. business. Of course, few companies are completely immune to the impact of U.S. tariffs, particularly if imports are part of their downstream supply chain. The benefits of less international-revenue exposure for midcaps go beyond tariffs. Sectors that show strength due to their largely domestic revenue base include healthcare, consumer staples and financials. Looking at specific stocks within the midcap market, we consistently see quality (as measured by the S&amp;P Quality Dividend Rankings) outperforming over time. Companies rated A- or better within the S&amp;P Midcap 400 MID have posted exceptional returns: 37.2% (3 years), 132.4% (5 years) and 171.4% (10 years) versus 9.8%, 116.9% and 107.7% over the same periods for their lower-quality peers, respectively. 1. Encompass Health: Encompass Health (EHC) blends growth potential with operational agility in the post-acute-healthcare sector. As the largest U.S. provider of freestanding inpatient rehabilitation facilities, EHC dominates a niche market with favorable secular growth drivers including an aging population and increasing demand for rehabilitation services. Its scale - operating 160 hospitals with $5.7 billion in trailing 12-month revenue as of the second quarter of 2025 supports a robust market presence while allowing nimble innovation, such as tech-enabled patient-care models. Despite labor shortages, rising healthcare costs and other headwinds, Encompass achieved 11.9% year-over-year revenue growth and a 22% increase in adjusted EPS in 2024, underscoring its financial strength and adaptability. Jensen's Mid Cap Strategy bought Encompass Health in October 2017, drawn to its leadership in post-acute care, fueled by an aging population and growing need for rehabilitation. EHC's competitive edge - 160 facilities, stringent regulatory barriers and technological innovation - distinguishes it from smaller competitors. The stock is still a top portfolio holding. EHC's nondiscretionary services ensure downside protection and steady demand, while its facility expansions capitalize on long-term favorable demographics. 2. F5: F5 (FFIV) is an under-the-radar technology leader in application delivery controllers, or ADCs, which are critical for managing internet traffic and ensuring application performance. The company is well-positioned across secular growth areas including AI, cloud migration, cybersecurity, e-commerce and data-center modernization. F5 demonstrates efficient capital deployment and a pristine balance sheet, reporting a 12% year-over-year increase in revenue in the third quarter of its 2025 fiscal year, led by a 39% surge in systems revenue and 16% growth in software. The company's market leadership, recurring revenue and exposure to high-growth technology themes makes F5 a resilient compounder, poised for sustained shareholder returns. The Mid Cap Strategy initiated a position in F5 in October 2019 as a way to diversify the strategy's exposure in software firms embracing cloud transitions. F5's strengths - leading application security, versatile multicloud tools and advanced load balancing - anchor its role in the portfolio, fueled by booming demand for hybrid cloud and AI-driven infrastructure. With subscriptions now driving most sales, F5's recurring revenues have expanded significantly, ensuring stable cash flows. 3. Tractor Supply: Tractor Supply (TSCO) has solidified its status as an indispensable rural retailer, offering many hallmark characteristics of a quality stock. We define this as a company with durable competitive advantages, high returns on capital and stable and predictable cash flows. The company's growth strategy includes plans to open 100 new stores in 2026, enhancing omnichannel capabilities and expanding loyalty programs - all underpinned by robust cash flow: $1.35 billion in trailing 12-month free cash flow as of the second quarter of 2025. The company's deep understanding of its specialized rural customer base creates a hard-to-replicate competitive edge, allowing it to adapt more nimbly than generalist big-box retailers. Despite macro headwinds such as inflationary pressures and supply-chain disruptions, Tractor Supply has maintained steady top line growth (up 2.8% for the trailing 12 months on a year-over-year basis) and consistent operational excellence - highlighting its resilience and appeal as a quality stock. The Jensen investment team initiated a position in Tractor Supply in August 2017, drawn by its compelling valuation as a quality stock. Tractor Supply's unique product mix - roughly 50% nondiscretionary goods such as animal feed and fencing - helps drive consistent customer traffic, regardless of the market environment. This stability provides downside protection while capturing long-term growth. While the team has opportunistically traded in the stock to take advantage of market fluctuations, it's retained in the portfolio for its strong cash flow, growth initiatives and high return on invested capital (about 34% over five years). 4. Lennox International: Lennox International (LII) designs, manufactures and markets energy-efficient HVAC and refrigeration solutions for residential and commercial uses, primarily in North America. The company's consistent revenue growth, high return on equity and strategic focus on innovation make it a quality company worth monitoring. Despite industrywide macro headwinds - such as U.S. EPA-mandated refrigerant transitions, higher material costs from U.S. tariffs, supply-chain disruptions and inflationary pressures - Lennox achieved 3% year-over-year revenue growth and margin expansion in the second quarter of 2025, underscoring its operational excellence and market resilience. No Jensen strategies are currently invested in this company, but the Mid Cap Strategy monitors it as a bench candidate. 5. Edward Lifesciences: Edward Lifesciences (EW) is a global leader in heart-disease solutions, specializing in transcatheter heart-valve replacement and repair, with second-quarter sales of $1.53 billion (up 12% on a year-over-year basis) and a full-year sales-growth forecast of 9% to 10%. Strategic initiatives, including the $4.2 billion divestiture of the company's critical care business and advancements in innovations like the EVOQUE and PASCAL systems, strengthen market position. Its robust R&amp;D pipeline and anticipated U.S. approval for asymptomatic transcatheter aortic valve replacement, or TAVR, in 2025, position Edwards for sustained leadership in the cardiovascular-medical-device market. Despite headwinds like regulatory complexities and rising healthcare costs, Edwards's 15% adjusted EPS growth in 2025 underscores its financial resilience and long-term growth potential. As with Lennox International, no Jensen strategy is currently invested in this company, but the Mid Cap Strategy monitors it as a bench candidate. Tyra Pratt is a portfolio manager at Jensen Investment Management (MORE TO FOLLOW) Dow Jones Newswires 09-27-25 1027ETCopyright (c) 2025 Dow Jones &amp; Company, Inc.</div></div>

Midcap stocks are gaining attention as a potential solution for investors seeking to reduce concentration risk in their portfolios. With a market capitalization range expanding from $1 billion to $104 billion, midcaps have shown resilience and growth potential, outperforming large and small caps in revenue growth. Currently trading at a discount compared to large caps, midcaps are less exposed to geopolitical risks and offer opportunities for active investors. Companies like Encompass Health exemplify the strength and adaptability of midcap stocks, showcasing significant revenue growth and operational agility.

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