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Small Caps Outshine Broader Market on Vaccine Hopes: 5 Picks

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After an astonishing performance in the election week, Wall Street has maintained its momentum this week so far buoyed by positive news on the coronavirus vaccine front. Vaccine development has significantly boosted investors' confidence in risky assets like equities.

Meanwhile, a closer look into the market will reveal that small-cap stocks performed better than their large-cap peers. At this stage, it may be prudent to invest in small-cap stocks with a favorable Zacks Rank for gains in the near future.

Small-Cap Stocks Outperform Large-Cap Peers

On Nov 9, Pfizer Inc. (PFE) and BioNTech SE (BNTX) announced that their jointly developed potential vaccine BNT162b2 was more than 90% effective in preventing COVID-19 in trial participants with no previous evidence of the SARS-CoV-2 infection.

Following the news, in the last two days, the Dow surged 3.9% and the S&P 500 rose a little over 1% while the Nasdaq Composite dipped 2.9%. The Dow's surge was primarily due to the fact that the index is more inclined to cyclical stocks, which are likely to benefit the most once the economy reopens to operate at the pre-pandemic level.

On the other hand, the Nasdaq's decline was mainly owing to a shift in investors' preference from growth-oriented technology stocks to cyclical stocks. Notably, the technology sector was the main driver of Wall Street's rally from April to August.

However, these three major stock indexes are predominantly large-cap centric. Meanwhile, in the last two days, the small-cap specific Russell 2000 and S&P 600 indexes climbed 5.4% and 7.7%, respectively. Notably, on Nov 9, the Russell 2000 Index reentered the positive territory on a year-to-date basis for the first time since Feb 21.

Owing to their predominantly domestic-focused business strategy, small businesses are highly dependent on the spending of U.S. consumers and businesses. However, the resurgence of coronavirus  forced several large businesses to operate at a sub-optimal level. These large enterprises reduced their input demand and consequently, small businesses suffered as large enterprises are the major customers of their final products.  

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.

Given their small-scale of operations, small businesses are generally cash-starved. These organizations operate on a thin profit margin and most new businesses are yet to achieve profitability. Therefore, the reopening of the economy will immensely benefit small businesses.

Our Top Picks

We have narrowed down our search to five small-cap stocks that popped more than 7% in the past week. These stocks have a strong growth potential and witnessed robust earnings estimate revisions in the last 30 days. 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 the past week.

 

World Acceptance Corp. (WRLD - Free Report) is engaged in small-loan consumer finance business. It offers short-term small installment loans, medium-term larger installment loans, related credit insurance, and ancillary products and services to individuals.

The company has expected earnings growth of 23.2% for the current year (ending March 2021). The Zacks Consensus Estimate for the current year has improved more than 31.4% over the last 30 days. The stock price jumped 19.7% in the past week.

Northrim BanCorp Inc. (NRIM - Free Report) provides commercial banking products and services to businesses and professional individuals in Alaska. It operates in two segments, Community Banking and Home Mortgage Lending.

The company has expected earnings growth of 63.5% for the current year. The Zacks Consensus Estimate for the current year has improved 27.1% over the last 7 days. The stock has climbed 15.4% in the past week.

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 30 days. The stock has rallied 12.4% in the past week.

Orrstown Financial Services Inc. (ORRF - Free Report) is a financial holding company. Its primary activity consists of owning and supervising its subsidiary, Orrstown Bank, that is engaged in providing banking and bank-related services.

The company has expected earnings growth of 12% for the current year. The Zacks Consensus Estimate for the current year has improved more than 15.7% over the past 30 days. The stock has appreciated 8.6% in the past week.

Chemung Financial Corp. (CHMG - Free Report) is a bank holding company, engaged in full-service commercial and consumer banking and trust business.

The company has expected earnings growth of 22.8% for the current year. The Zacks Consensus Estimate for the current year has improved more than 22.8% over the last 30 days. The stock price advanced 7% in the past week.

More Stock News: This Is Bigger than the iPhone!

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