Investors love finding the next great stocks. They also love buying stocks that are among the next buyout targets. It just so happens that many stocks in both of these categories can be found among mid-cap stocks. The question is how mid-cap stocks are valued against small-cap and large-cap stocks.

Credit Suisse’s U.S. Equity Strategy analyst is Lori Calvasina, and she has a warning for mid-cap investors. Her take is that mid-cap stocks currently have the highest price tag among all three groups based on market caps. The only saving grace may be that not all mid-cap industry groups are overvalued against small-cap and large-cap stocks.

Due to stronger earnings and growth metrics as a class, the big issue is that many small-cap fund managers and many large-cap fund managers also own mid-cap stocks. After all, successful small-cap stocks grow up to be mid-cap stocks. And many large-cap stocks become mid-cap stocks, or the mid-cap stocks offer enough industry leverage that a large-cap fund manager feels the necessity to own them.

Calvasina’s valuation analysis on the broader U.S. equity market now shows that mid-cap stocks are extremely overvalued relative to history. She also believes that mid-cap stocks are also overvalued versus both small-cap and mega-cap stocks.

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Calvasina said:

Mid-caps tend to see stronger earnings growth and performance than both mega caps and small caps, and, as a result, tend to be heavily owned in large cap funds as well as small and small-to-mid-cap (SMID) managers. Our valuation analysis on the broader US equity market has indicated that mid-caps are extremely overvalued relative to history (similar to small cap & large cap), and that mid-caps are also overvalued vs. both small cap and mega cap. But not all mid-cap industry groups are overvalued, and the full report identifies those that are and those that are not.

Based on forward price-to-earnings (P/E) ratio analysis, the major defensive industries and sectors look the most overvalued to Calvasina. These include utilities and telecom, health care equipment and services, and pharma/bio and life sciences. Additional areas of frothiness were shown in commercial and professional services, as well as the software and services segment.

Mid-caps look particularly pricey against mega-caps for a number of consumer groups: consumer services; food, beverage and tobacco; autos; food and staples retail; and telecom services.

Again, it is not universal that mid-caps are overvalued against small-cap or large-cap stocks. Credit Suisse’s report indicated that mid-caps still look undervalued relative to small-caps in areas that are beneficiaries of cheap oil — consumer services, retail and transportation. Other areas listed as not overly expensive were semiconductors and semiconductor equipment, as well as technology hardware and equipment.

Where mid-cap stocks look particularly undervalued against mega-cap stocks is in energy, consumer durables and apparel, commercial services, and materials.

Credit Suisse’s analysis was based on companies that are members of the Russell mid-cap index. This generated a weighed average market cap of $13.3 billion, while the largest stock was valued at $33.9 billion.

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