Back to top

Forget Greece, Buy These Small-Cap Value Stocks Instead

Read MoreHide Full Article

Despite some frantic overtures to international creditors to avert missing a debt payment of €1.5 billion or about $1.7 billion to the International Monetary Fund (IMF), Greece became the first developed economy in the world to default on a loan early Wednesday.

The events followed a flurry of diplomatic talks to bring back creditors to the negotiation table, which proved to be inconclusive. As a last resort, Greek Prime Minister Alexis Tsipras even sought a new two-year loan of nearly €30 billion as well as a debt restructuring to remain afloat. There were even signals that the July 5th referendum, which was viewed as a democratic right to decide on the financial aid in exchange of budgetary cuts and austerity measures, could be scrapped if a last-minute deal was reached.

However, nothing seemed to work in favor of the beleaguered country as it suffered a humiliating loan default to the IMF, similar to nations like Zimbabwe, Sudan and Cuba.

What Happens Next?

With the default, Greece is likely on the path to make an exit from the Eurozone and stop using the single currency euro. The ‘Grexit’ by the seemingly weak link in the 19-member Eurozone could cause rippling effects for other struggling nations and force Spain, Italy and Portugal to follow suit. This in turn could further damage the European Union and disintegrate the Eurozone that was just finding its feet after a two-year hiatus as it expanded by 0.4% during the first quarter.

Back home, the turn of events could further lead to more capital market reform and cuts in wages and pension bills. The Greeks have already had a bitter foretaste of the economic woes that are likely to follow in such a situation as the government forced a shutdown of banks and stock exchange until July 7th.

A daily cash withdrawal limit has been set at €60 to limit the capital outflow of the country. Although no imminent danger of currency shortfall has been reported yet, experts fear that the situation could snowball into social upheaval if banks remain shut beyond a week.

The U.S. Fallout

Although the U.S. economy would have minimal direct exposure to the Greek crisis, it would still be prone to some volatility in the equity market. Ramifications from a potential ‘Grexit’ could result in a wave of panic over Europe and spill over into the U.S., delaying the probable hike in interest rates by September end.

A prolong crisis in the European country could further result in a flight-to-safety to U.S. Treasury bonds for investors, thereby strengthening the dollar and contracting exports and economic growth. This could jeopardize a widespread euphoria among experts regarding a stronger second half for the U.S. economy with strengthening housing market and encouraging growth in consumer spending.

Small-Cap Stocks: Potential Saviors

Amid the intense equity market volatility, small cap stocks remain the ideal choice to tide over the storm. This is primarily due to the fact that small-cap stocks remain immune to the strong U.S. dollar and sluggish global economy, unlike its bigger counterparts.

One might also use the analogy of gale-force winds that uproot larger trees while leaving smaller ones unscathed. Seldom do we find any smaller tree to bear the brunt of nature’s fury when bigger trees are severely damaged.

Drawing similar comparisons, the Russell 2000 index, which measures the performance of the small-cap segment of the U.S. equity universe, is up 4.1% this year compared to 0.2% by the S&P 500 and -1.1% by the Dow Jones. The superior show of strength is driven by the fact that bulk of revenues are derived from the domestic market, unlike that of its peers in the S&P 500 index where 60% of revenues come from the U.S. on an average.

3 Small-Cap Stocks to Bet On      

As the small-cap stocks appear outright winners in the volatile equity market, let us take a closer look at some priceless small-cap value stocks that are backed by a favourable Zacks Rank and impressive Zacks Style Score.

The Zacks Style Score for value takes into account all valuation metrics to give us an actionable metric that helps identify stocks truly trading at a discount to intrinsic value. Back-tested results show that stocks with Style Scores of ‘A’ or ‘B’ when combined Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) handily beat all other stocks.

Virco Mfg. Corporation (VIRC - Free Report) : Headquartered in Torrance, CA, Virco designs and markets furniture for the commercial and education markets in the U.S. With a market capitalization of $42.3 million, the company serves public and private schools, colleges and universities, convention centers, federal and state institutions, churches and other businesses.

This Zacks Rank #1 (Strong Buy) stock is currently trading at a forward P/E of 9.2x and appears to be a solid pick with the highly desirable Zacks Value Style Score of ‘A.’

Electromed, Inc. : Founded in 1992, Electromed has created a niche market for itself, selling products that facilitate airway clearance by loosening and mobilizing respiratory secretions in patients' lungs. Headquartered in New Prague, MN, the company sells its products through a network of direct sales representatives and independent distributors.

Electromed currently has a market capitalization of $15.1 million. With a forward P/E of 15.4x and long-term earnings growth expectations of 10.0%, Electromed is a solid pick. This Zacks Rank #2 (Buy) stock has the highly desirable Zacks Value Style Score of ‘A.’

Willdan Group, Inc. (WLDN - Free Report) : Headquartered in Anaheim, CA, Willdan offers professional technical and consulting services to utilities, private industry and public agencies at various levels of government in the U.S. This Zacks Rank #2 stock with a market capitalization of $87.4 million boasts a specialized talent base that has delivered a track record of consistent growth in contract revenues and strong performance metrics.

With a forward PE of 12.4x and Zacks Value Style Score of ‘A,’ Willdan surely appears to be great small-cap stock to benefit.

Moving Forward

Peter Kenny, chief market strategist at technology firm ClearPool Group, observed: “The Greek economy is a sieve. It’s leaking everywhere. So even once banks have opened after July 6, we’re going to see capital outflows accelerate. That story will dominate the U.S. equity narrative at least through then, and be a top-tier driver of markets for well past mid-July, and be a primary driver until then.” Meanwhile, investors should be better off investing in these priceless small-cap stocks to churn attractive yields from the volatile market.

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Willdan Group, Inc. (WLDN) - free report >>

Virco Manufacturing Corporation (VIRC) - free report >>

More from Zacks Analyst Blog

You May Like