Wall Street performed impressively in the coronavirus-stricken 2020 defying, unprecedented economic devastations. The resurgence of new COVID-19 cases failed to dampen market participants' sentiments owing to the approval of two vaccines and Congressional agreement on a fresh $900 billion fiscal stimulus.
Aside from large-cap stocks, small caps also had a great year. The major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — rallied 7.3%, 16.3% and 43.6%, respectively, in 2020. The small-cap centric Russell 2000 jumped 30.6%. The index crossed the 2000 milestone for the first time in Dec 23 and recorded a fresh all-time high of 2,026.24 on Dec 28.
Several small-cap (market capita < $1 billion) stocks have outperformed the market in 2020. At this stage, investment in top-ranked stocks with strong growth potential for this year will be prudent.
Stimulus Helps in Revival of Small Businesses
In March 2020, the U.S. government provided more than $800 billion to small businesses as part of the CARES Act, which ended in July. In June 2020, 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 purchase 95% of each loan extended under the facility.
On Dec 20, the U.S. Congress finally reached an agreement to approve $900 billion of a fresh coronavirus-aid package after more than four months of failed negotiations. Notably, the deal includes approximately $300 billion of the small business paycheck protection program.
Importance of Small Businesses
Small businesses 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.
However, 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. In this regard, massive fiscal and monetary injected by the government and the Fed helped small businesses to survive the sudden economic devastations.
Finally, the U.S. economy will gradually return to the pre-pandemic level as more parts of it reopen once the vaccination process will speed up. Consequently, reopening of the economy is likely to result in greater momentum for small businesses.
Notably, in its latest report, the National Federation of Independent Business reported that its Small Business Optimism Index rose 2.6 point to 101.4 in November, well above its 47-year historical average of 98.0.
Our Top Picks
We have narrowed down our search to five small cap stocks that have strong growth potential for 2021 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 three months.
Ryerson Holding Corp. ( RYI Quick Quote RYI - Free Report) processes and distributes industrial metals in the United States, Canada, Mexico, and China. The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 30 days. The stock price has soared 137.1% in the past three months. Schnitzer Steel Industries Inc. ( SCHN Quick Quote SCHN - Free Report) recycles ferrous and nonferrous scrap metals and manufactures finished steel products worldwide. It operates in two segments, Auto and Metals Recycling, and Cascade Steel and Scrap.
The company has an expected earnings growth rate of more than 100% for the current year (ending August 2021). The Zacks Consensus Estimate for current-year earnings has improved 16.3% over the last 30 days. The stock price has jumped 83.8% in the past three months.
Scholastic Corp. is the world's largest publisher and distributor of children's books and a leader in educational technology and children's media. It operates in three segments: Children's Book Publishing and Distribution, Education, and International.
The company has an expected earnings growth rate of more than 100% for the current year (ending May 2021). The Zacks Consensus Estimate for the current year has improved 11.1% over the last 30 days. The stock has climbed 24.4% in the past three months.
P.A.M. Transportation Services Inc. ( PTSI Quick Quote PTSI - Free Report) operates as a truckload transportation and logistics company in the United States, Mexico, and Canada. It is involved in the transportation of general commodities.
The company has an expected earnings growth rate of 94.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 19% over the last 30 days. The stock price has advanced 14.9% in the past three months.
Meridian Bioscience Inc. ( VIVO Quick Quote VIVO - Free Report) develops, manufactures, distributes, and sells diagnostic test kits primarily for gastrointestinal and respiratory infectious diseases, and elevated blood lead levels worldwide. It operates through the Diagnostics and Life Science segments.
The company has an expected earnings growth rate of 11.2% for the current year (ending September 2021). The Zacks Consensus Estimate for current-year earnings has improved 11.2% over the last 30 days. The stock price has surged 14.8% in the past three months.
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