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5 Small Hidden Gems to Buy to Tap Wall Street Rally

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Wall Street has been witnessing an impressive rally in 2023 after a highly disappointing 2022. Year to date, the three large-cap benchmarks — the Dow, the S&P 500 and the Nasdaq Composite — have climbed 7.3%, 19.5% and 37.1%, respectively. Aside from large-cap-centric indexes, the small-cap-specific benchmark — the Russell 2000 — has advanced 12.5%.

In 2022, small-cap companies suffered from a record-high inflation, a soaring interest rate and fear of an impending recession. However, this year, this segment of the economy found relief from these three concerns.

First, the inflation rate has been steadily dwindling since June 2022. A lower inflation rate has reduced the input costs for these companies. Small businesses have little option to shift higher input costs in their final products.

Second, since the beginning of 2023, the Fed has reduced the magnitude of interest rate hike. The central bank has given enough indication that it is approaching the end of the ongoing rate hike cycle. Small businesses are highly dependent on easy access to cheap credit.

Third, a series of key economic data released so far this year has clearly indicated no sign of a near-term recession. The labor market stayed tight and the fundamentals of the U.S. economy have remained resilient. For the last three quarters, GDP has grown well above market’s expectations.

Small businesses are predominantly dependent on the domestic economy. They generally have very little access to export markets. Therefore, a U.S. recession could have been disastrous for them.

Our Top Picks

We have narrowed our search to five small-cap (market capital < $1 billion) stocks. These stocks have strong growth potential for the rest of 2023 and have seen positive earnings estimate revisions in the last 60 days. Finally, 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.

Zacks Investment Research
Image Source: Zacks Investment Research

Alta Equipment Group Inc. (ALTG - Free Report) is an industrial and construction equipment company. ALTG offers new and used industrial products and construction products which includes aerial fleet, forklifts, plows, trailers, wheel loaders, recycling/demolition machines, concrete paving equipment, excavators, pavers, cranes, earthmoving, compact equipment and materials handling products.

Alta Equipment Group has expected revenue and earnings growth rates of 16.3% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.1% over the last seven days.  

Medallion Financial Corp. (MFIN - Free Report) is a specialty finance company in the United States that originates and services loans that finance taxicab medallions and various types of commercial loans. MFIN operates through four segments: Recreation Lending, Home Improvement Lending, Commercial Lending, and Medallion Lending.

Medallion Financial has expected revenue and earnings growth rates of 11.4% and 15.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 56.8% over the last seven days.  

Bank7 Corp. (BSVN - Free Report) is the bank holding company for Bank7, which operates as a community bank. BSVN accepts deposits and makes loans, as well as provides card facilities, investments, certification of deposits, wealth management and online banking services.

Bank7 has expected revenue and earnings growth rates of 16.6% and 23.3%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4.5% over the last 30 days.  

Gladstone Capital Corp. (GLAD - Free Report) is a specialty finance company that invests in debt securities consisting primarily of senior-term loans, senior subordinated loans, and junior subordinated loans in small and medium-sized companies. GLAD mainly serves small and mid-sized private businesses.

Gladstone Capital has expected revenue and earnings growth rates of 32.2% and 14.9%, respectively, for the current year (ending September 2023). The Zacks Consensus Estimate for current-year earnings has improved 2.9% over the last seven days.  

Preferred Bank (PFBC - Free Report) provides various commercial banking products and services to small and mid-sized businesses and their owners, entrepreneurs, real estate developers and investors, professionals, and high net-worth individuals in the United States. PFBC accepts checking, savings, and money market deposit accounts; fixed-rate and fixed maturity retail, and non-retail certificates of deposit; and individual retirement accounts.

Preferred Bank has expected revenue and earnings growth rates of 15.8% and 17.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.3% over the last 30 days.

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