Title:   Portfolio Update — DGX + Mid-Caps
Show:    Haymaker (Substack) — Portfolio Update, paid
Guest:   David Hay / The Haymaker Team (co-founder & ex-CIO Evergreen Gavekal)
Date:    2026-AUG-17
URL:     https://haymaker.substack.com/p/portfolio-update-30d
Length:  written Substack post — no timestamps
Note:    Written Substack post; no timestamps; text verbatim, images/charts omitted (the Bloomberg
         price charts and the referenced Tesla index-inclusion video are marked inline in brackets
         where they appeared). Captured via Stephen's logged-in subscriber session. Standard
         Haymaker legal disclosure boilerplate omitted.
=====

Hello, Haymakers:

The main topic of this week's Update is IJH, which has been in and out of Haymaker focus for years, but which today warrants another in-depth look. Whether it's a name you've been following with us since our first mention or one you haven't been tracking at all, you'll want to hear us out on its recent trajectory and where we think it's heading.

Before getting into Mid-Caps… we'd like to run a briefer follow-up on a much more recent Haymaker recommendation: Quest Diagnostics. This one made its initial Portfolio appearance just a couple of months back, but there's enough activity to warrant a quick, well, diagnostic, if you will. As we don't have as much history to cover here, the update is accordingly brief.

Enjoy the read!

Part I: Quest Diagnostics (DGX)

We recommended Quest Diagnostics on June 5, 2026, at $200.29. The stock is trading today at approximately $236 for a gain of roughly 18% in just over two months, plus the $0.86 quarterly dividend. Considering the S&P's ~6% gain in that time, DGX is a respectable outperformer. The Q2 earnings report on July 23 was the catalyst, with the stock surging 11.15% on the day. Our thesis has been directionally right so far and the question is whether meaningful upside remains.

Five-Year Price Chart (prior overhead resistance displayed) [Bloomberg chart]

Obviously, we missed the key upside range expansion early last year, but we did catch a retracement to near the breakout point not that far above $180. It was also smack dab on the 200-day moving average. Buying relatively close to the resistance penetration spot and at the 200-day is typically a profitable tactic. Fortunately, this was no exception.

At this point, consensus targets of $239 to $246 imply modest near-term upside, but the Argus and BofA bull case targets of $260 to $265 remain in play if Q3 delivers another beat-and-raise on October 27, which the volume momentum and conservative guidance pattern suggest is likely. The Corewell JV laboratory opening in 2027 and continued double-digit advanced diagnostics growth are the medium-term compounders not yet fully in run-rate numbers.

The valuation, along with the price chart, is undeniably extended presently. For those looking to book profits, and/or reduce market exposure, booking at least partial profits, like by selling one-third, might be advisable.

We lean toward holding the core position through October 27. Trim only if the position has grown to an uncomfortable share of your portfolio's weight. In our view, the business is still executing precisely as the June thesis described.

Part II: Mid-Caps — A High-Probability Way to Beat the S&P 500 Over the Next Decade

Back on March 18th, 2024, this newsletter made a bullish case for Mid-Cap stocks. The specific vehicle we recommended to play what we believed was a relatively low-risk opportunity was IJH, the iShares Core Mid-Cap ETF. Per the following image, it has had a nice run since we gave it a strong endorsement.

Six-Year Price-Chart (breakout point displayed; we went back longer since this pick-to-click was nearly two and a half years ago) [Bloomberg chart]

Over that time, IJH has risen about 30%. With dividends included, the total return has been 33%. That's a compound annual growth rate of around 12 ½%. Clearly a pleasant outcome, but the S&P 500 has significantly bested this with a 50% total return.

A prime reason for this outperformance by the Large-Cap index is due to its capitalization-weighted construct. This means the biggest companies have a much greater impact, particularly these days when the top 10 S&P constituents represent 38% of the world's most popular index. Additionally, it's been the mega-cap stocks, like Microsoft (MSFT) and Alphabet/Google (GOOG), that have been reporting blockbuster earnings.

In March of 2024, the S&P was trading at 21 times forward earnings estimates while the Mid-Cap index was around 16. Despite the S&P aforementioned 50% total return, its P/E has actually decreased slightly to 20 times the consensus projection for the next 12 months. This speaks to how strong profits have been for the blue chip index. As several recent Haymaker notes have pointed out, in addition to robust organic growth, this is a function of companies such as GOOG reporting massive gains on their holdings in AI entities like Anthropic. [Bloomberg chart]

In GOOG's case, those have represented more than 50% of its profits in the first two quarters of this year. Mid-Caps have lacked this immense, though unsustainable, earnings booster rocket. Our belief is that there is a looming mean reversion in the S&P 500's profit margins. If so, this will work in favor of IJH, as well as the other Mid-Cap ETFs. Said differently, on a normalized profit-margin basis, the S&P 500 is far more overpriced than it superficially appears.

Nonetheless, Mid-Caps are trading at a forward P/E (i.e. using Wall Street estimates for the next 12 months) of 17. That's not outrageous by any means, but it is close to the peak this decade outside of the pandemic period when profits were hard hit (thereby raising the P/E). [Bloomberg chart]

One of the reasons we cited for preferring Mid-Caps in the late winter of 2024 was that this style often catches companies as their growth accelerates and their stock price reflects this uplift.

The example we used back then was Super Micro Computer (SMCI). Here was its stock chart at the time: [Bloomberg chart] (Note there was a 10:1 split in SMCI shares — adjusted peak was roughly $114)

Our suspicion was that it would soon be pulled up to the S&P 500 out of the Mid-Cap index because of its explosive market cap increase. That happened almost as soon as we hit "Send". To say the timing was unfortunate, at least for S&P 500 index investors, is a considerable understatement.

Price Chart Since 8/18/2023 (split adjusted) [Bloomberg chart]

From the time of its "graduation" to the Large-Cap index, SMCI has experienced a bit of a derating… like by nearly 70%. Of course, it was a small part of the S&P so the cost of this value implosion to its shareholders was negligible. But when multiplied by dozens, if not hundreds, of these events, that can add up to a material performance drag over time. (Tesla was a much more impactful — and controversial — example of messy index inclusion; for a brief video overview of that fiasco, please check out this link: [video link])

Perhaps this effect is a prime factor behind Mid-Cap's long-term outperformance of the S&P 500, despite that it has badly lagged over the last 15 years. Irrespective of this, Mid-Caps/IJH have clobbered the S&P 500 for the full duration of the 21st century. It's our belief you could win a lot of money betting your brother-in-law about this factoid. [Bloomberg chart]

We continue to perceive an unusually large number of threats hovering over the market. Margin debt having gone vertical is merely one of them, though among the most serious. [Bloomberg chart]

Accordingly, we'd be cautious even with Mid-Caps and, for risk wary types, we wouldn't quibble with booking some gains on IJH. However, over the next 10 years, we are adamant that Mid-Caps will dramatically outperform the world's most beloved equity index.

The Haymaker Team