These 4 unflashy mid-cap stocks are on track to be tomorrow's mega-caps, according to one $3.2 billion fund manager

Wall Street bullPhoto by Robert Nickelsberg/Getty Images

• Lori Keith says there's one part of the market that's been overlooked this year: mid-caps.
• Mid-cap stocks offer quality and significant upside, says Keith, a PM at Parnassus Investments.

If you invested $1,000 in Nvidia just five years ago, you'd have over $27,500 today.

The key to maximizing stock-market returns is to buy in early before the hype. The Magnificent Seven have incredibly high market caps now, but they were small- and mid-sized companies before they were market behemoths.

That's why Lori Keith, director of research and portfolio manager at Parnassus Investments, is such a big fan of mid-cap stocks. Keith oversees $3.2 billion of assets in the Parnassus Mid Cap Fund. Her investment strategy centers on finding quality companies with long runways for revenue and profit growth.

Investor sentiment this year has been mainly focused on mega-caps and small-caps, with not much appreciation for the middle. But Keith believes mid-caps offer the best of both worlds. Small caps have high growth potential but are also high-risk and often unprofitable. On the other hand, large caps may have difficulty sustaining high growth rates going forward, meaning that there's limited upside.

Mid-cap companies are usually defined as those with market caps from around $2 billion to $10 billion, but Keith takes a more liberal definition, considering companies valued even over $100 billion.

"It's a really attractive place for investors," Keith said of mid-cap stocks. "There are really strong defendable businesses that often have the ability to capture additional growth relative to the large-cap stocks that are a bit more saturated."

The mid-caps with the most potential are usually not household names, Keith said. But they do have strong balance sheets with plentiful free cash flow and low debt, and often have sufficient capital to expand overseas and fund acquisitions. And most importantly, Keith is looking for companies with a differentiated product in the market, or what Warren Buffett has dubbed an "economic moat."

Under this strategy, several of Keith's picks have quickly expanded their businesses and outgrown the mid-cap label. Keith is particularly bullish on mid-caps in areas of the market such as software, semiconductors, real estate, and healthcare.

Below, she shares 4 mid-cap companies with strong long-term growth prospects and the potential to become market dominants. They are all constituents of the Parnassus Mid Cap Fund.