Consider Mid-cap Equity Investments

Remember Cbeyond Incorporated (NASDAQ/CBEY)? This growing technology company is doing great in this market and despite its high valuation, just keeps on going up.

I first wrote about this company in this column in September of last year. The stock was trading around $25.00 per share. Now, the stock is trading around $38.00 per share and looks to be in a solid upward trend.

Cbeyond is based in Atlanta and sells voice and broadband telecom services to small businesses in Chicago, Dallas, Denver, Atlanta, Houston, and Los Angeles. The company offers traditional local, long-distance, and Internet access; as well as enhanced applications like Web hosting, data backup, and file sharing. The company maintains its own private network that uses “Voice over Internet Protocol” (VoIP).

Who would have thought that a telecom company selling long distance would become so successful? In the first quarter this year, the company’s revenues grew 33% over the comparable quarter to $63 million. Net income was $2.7 million in the first quarter, up quite a bit from a net income of $200,000.00 or close to breakeven. The company finished the quarter with $39.4 million in cash and zero debt.

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Cbeyond is the perfect example of successful mid-cap equity investment. What the stock has always been is expensive. Yet, despite its high valuation, the stock just got more expensive. In a sense, you are getting what you, as an investor, paid for — you are getting solid growth.

Some institutional investors won’t even consider a stock for investment if its valuation is over a certain level. I think it is a mistake to act like this. In the stock market, a company’s valuation is relative. There is no one benchmark to readily determine what a company’s valuation should be.

Cbeyond is probably the kind of stock that many investors wouldn’t touch because of its high P/E ratio. That’s too bad, because the stock has been such a great wealth creator. In the end, I think it’s important to have a mix in your portfolio. This includes mixing up higher valuation companies with lower valuation companies. All that matters is if the stock is going up and you have solid risk controls in place.