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Small Caps Up in October Defying Broad Market Trend: 5 Picks

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Wall Street witnessed back-to-back monthly declines in the last two months, primarily due to resurgence of coronavirus infections in the United States and Europe, uncertainty regarding the second round of fiscal stimulus and U.S. presidential election-specific volatility. The three major stock indexes —  the Dow, the S&P 500 and the Nasdaq Composite —  tumbled 4.6%, 2.8% and 2.3%, respectively, in October.

However, surprising market participants, small-cap stocks in fact gained in October in contrast to the broader market trend. The small cap-specific Russell 2000 Index gained 2% last month. Another small cap-centric index, the S&P 600, rallied 2.5% in October.

Small Business Optimism Index Climbs in September

On Oct 13, the National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index rose 3.8 points to 104 in September from 100.2 in August. The index came in at 98.8 in July and 100.6 in June. However, the index is yet to reach its pre-pandemic level of 104.5 in February.

September's data showed that nine of the 10 components of the index improved while one declined. The number of small businesses anticipating higher real sales in the next three months increased 5 points to 8%.

The number of small business owners expecting the economy to improve increased 8 points to 32%. The percentage of small business owners planning to create new jobs grew 2 points to 23% and percentage of small business owners thinking it is good time to expand rose 1 point to 13%.

Stimulus Helps in Revival of Small Businesses

On Jun 15, the Fed initiated a lending program of up to $600 billion to small and mid-sized businesses. Under this program, businesses with up to 15,000 employees or revenues of up to $5 billion will get a loan in the range of $250,000 to $300 million for 5 years at floating rate.

On Oct 30, the central bank reduced the minimum loan size to $100,000 from $250,000 and decided to ease restrictions on debt for companies already participating in the Paycheck Protection Program. The central bank will encourage retail banks to lend out to struggling companies and will purchase 95% of each loan extended under the facility.

Small Businesses Are Vital

Small corporates create a significant number of jobs in the U.S. economy. More than 50% of the newly created jobs in the private sector originate here. These people constitute a large part of customers for big businesses.

Moreover, small companies are a major part of the supply chain management systems of large companies for innovative and technologically superior inputs. Additionally, small businesses more often than not form a vital cog in corporate America's customer base.

The U.S. economy will gradually return to the pre-pandemic level as more parts of it reopen. Consequently, further reopening of the economy is likely to result in greater momentum for small businesses.

Our Picks

We have narrowed down our search to five small-cap stocks that popped more than 15% in October. These stocks have strong growth potential and witnessed robust earnings estimate revisions. Each of our picks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in October.

 

HomeStreet Inc. (HMST - Free Report) operates as the bank holding company for HomeStreet Bank, a state-chartered commercial bank that provides commercial and consumer banking services primarily in the Western United States. It offers deposit and insurance products, private banking and cash management services, and other banking services.

The company has expected earnings growth of 95.9% for the current year. The Zacks Consensus Estimate for the current year has improved more than 25.2% over the past 7 days. The stock price soared 20.6% in October.

Haverty Furniture Companies Inc. (HVT - Free Report) operates as a specialty retailer of residential furniture and accessories in the United States. It offers furniture merchandise under the Havertys brand name.

The company has expected earnings growth of 25% for next year. The Zacks Consensus Estimate for the next year has improved more than 4.3% over the past 7 days. The stock price jumped 19.4% in October.

Independent Bank Corp. (IBCP - Free Report) is a bank holding company  principally serving rural and suburban communities located across Michigan's Lower Peninsula. The company has an expected earnings growth of 18% for the current year. The Zacks Consensus Estimate for the current year has improved more than 25.5% in the past 7 days. The stock price climbed 19.1% in October.

Ethan Allen Interiors Inc. (ETH - Free Report) operates as an interior design company, and manufacturer and retailer of home furnishings in the United States and internationally. It operates in two segments, Wholesale and Retail.

The company has expected earnings growth of more than 100% for the current year (ending June 2021). The Zacks Consensus Estimate for the current year has improved more than 2.6% over the past 7 days. The stock price rose 18.5% in October.

South Plains Financial Inc. (SPFI - Free Report) operates as a bank holding company for City Bank that provides commercial and consumer financial services to small and medium-sized businesses and individuals. It operates through two segments, Community Banking and Insurance.

The company has expected earnings growth of 37.9% for the current year. The Zacks Consensus Estimate for the current year has improved more than 37.1% over the past 7 days. The stock price gained 18% in October.

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