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The small-cap index Russell 2000 recently witnessed its most impressive week in over two years as investors bet on the Federal Reserve's halt in its interest rate hike cycle. The space has struggled in the past six months. However, tables seem to be turning for the pint-sized stocks.
The group should gain momentum in the final days of this year. Hence, let’s delve a little deeper into what are the tailwinds for small-cap Investing. In this regard, we ran a screener that yielded Lifetime Brands (LCUT - Free Report) , Ryerson (RYI - Free Report) , Strattec Security (STRT - Free Report) , Comtech Telecommunications (CMTL - Free Report) and The Marcus (MCS - Free Report) as the likely winners.
Is Fed Done Raising Rates?
Bets that the Fed is done raising rates strengthened on softer jobs data for the month of October. The Fed announced on Nov 1, 2023, that it would keep its benchmark interest rate within the range of 5.25% to 5.50%. Agreed, the central bank has left the door open for potential future actions as it continues to grapple with sticky inflation.
But bets over such hawkish steps have weakened lately. CME FedWatch tool revealed that there is a 90.4% chance of the rates remaining the same in December (at the time of writing) and an 82.9% chance that the Fed will again stay put in late January.
Don’t Fear Debt Concerns of Small Caps
One of the reasons for the recent underperformance of small-cap stocks has been their relatively high debt levels compared to larger companies, per Lori Calvasina of RBC Capital, as quoted on Yahoo Finance. However, Calvasina points out that RBC's research indicates that about 40% of the small caps’ debt is scheduled to mature over the next two to five years. This means several small-cap stocks may adapt to evolving interest rate environments, especially given that the Fed may begin cutting interest rates at some point in 2024.
Interest Rate Outlook and Historical Comparisons
Lori Calvasina also drew attention to the broader interest rate environment and indicated that even if interest rates have risen this year, they have been rising from a much lower baseline than in past economic cycles. This aspect is often overlooked.
IMF Boosts U.S. Growth Forecast
The International Monetary Fund (IMF) recently boosted the U.S. growth forecast for 2023 while keeping the global outlook unchanged. The U.S. growth projection for this year was raised by 0.3 percentage points from its July update to 2.1%. The IMF hiked next year’s forecast by 0.5 percentage points to 1.5%. For the Eurozone, the IMF cut the forecast by 0.2 percentage points to 0.7% for 2023 and by 0.3 percentage points to 1.2% for 2024, per CNBC.
Better-than-expected U.S. economic recovery is a plus for small-cap stocks. Since small-cap stocks are closely tied to the domestic economy, an uptick in the economic outlook bodes well. These stocks are not heavily export-centric and, hence, do not get battered if the greenback rises.
Resilient U.S. Consumers
Despite sticky inflation, U.S. consumers have been showing strong resilience. Retail sales in the United States grew 0.7% sequentially in September 2023, following an upwardly revised 0.8% uptick in August and beating forecasts of a 0.3% advance. The data continues to indicate robust consumer spending despite high prices and borrowing costs. This is another positive for the small-cap space.
Geopolitical Tensions are Rife
The war between Gaza and Israel has been hitting the headlines. Due to the Middle East tensions, safe-haven assets jumped last month. If the war is not contained soon, the global markets may face a chaotic situation in the ongoing fourth quarter. Against this background, pivoting toward domestic equities could prove to be an intriguing idea.
Cheaper Valuation of Small-Caps
The Russell 2000 hasn't been this cheap compared to the S&P 500 since the tech bubble in the late 1990s into the early 2000s, per RBC Capital, as quoted on Yahoo Finance. As a result, investors can bet on small-cap ETFs that have a lower P/E than the S&P 500’s P/E of 17.86X.
Small-Cap Value Stocks to Buy
Against this backdrop, below we highlight a few small-cap stocks that have a Zacks Rank #1 (Strong Buy) or #2 (Buy), an upbeat Value Score of “A” or “B” and have seen the Zacks Consensus Estimate for EPS rising by at least 2% in the past four weeks.
The Zacks Rank #1 company is a leading designer, marketer and distributor of kitchenware, cutlery & cutting boards, bakeware & cookware, pantryware & spices, tabletop and bath accessories. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 3.33% in the past month. Its Value Score is A.
The Zacks Rank #1 company processes and distributes metals. The company, through its subsidiaries, purchases, processes and distributes various forms of stainless steel, aluminum, carbon, alloy steel, nickel and red metals.
The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 3.33% in the past month. The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 9.09% in the past month. Its Value Score is A.
The Zacks Rank #2 company designs, develops, manufactures and markets mechanical locks, electro-mechanical locks and related products for automotive manufacturers with operations in the United States, Canada and Mexico.
The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 3.33% in the past month. The Zacks Consensus Estimate for the upcoming fiscal year’s earnings per share has risen from a loss of 10 cents to a gain of $0.86 in the past month. Its Value Score is A.
The Zacks Rank #2 company designs, develops, produces and markets innovative products, systems and services for advanced communications solutions. The company sells products to a diverse customer base in the global commercial and government communications markets.
The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 53.85% in the past month. Its Value Score is B.
The Zacks Rank #2 company engages in the lodging and entertainment industries. It operates through two segments: Movie Theatres, and Hotels and Resorts. The company's movie theatre division owns or manages screens at locations in several states, as well as a family entertainment center.
The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 13.21% in the past month. Its Value Score is A.
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5 Top-Ranked Small-Cap Value Stocks to Buy
The small-cap index Russell 2000 recently witnessed its most impressive week in over two years as investors bet on the Federal Reserve's halt in its interest rate hike cycle. The space has struggled in the past six months. However, tables seem to be turning for the pint-sized stocks.
The group should gain momentum in the final days of this year. Hence, let’s delve a little deeper into what are the tailwinds for small-cap Investing. In this regard, we ran a screener that yielded Lifetime Brands (LCUT - Free Report) , Ryerson (RYI - Free Report) , Strattec Security (STRT - Free Report) , Comtech Telecommunications (CMTL - Free Report) and The Marcus (MCS - Free Report) as the likely winners.
Is Fed Done Raising Rates?
Bets that the Fed is done raising rates strengthened on softer jobs data for the month of October. The Fed announced on Nov 1, 2023, that it would keep its benchmark interest rate within the range of 5.25% to 5.50%. Agreed, the central bank has left the door open for potential future actions as it continues to grapple with sticky inflation.
But bets over such hawkish steps have weakened lately. CME FedWatch tool revealed that there is a 90.4% chance of the rates remaining the same in December (at the time of writing) and an 82.9% chance that the Fed will again stay put in late January.
Don’t Fear Debt Concerns of Small Caps
One of the reasons for the recent underperformance of small-cap stocks has been their relatively high debt levels compared to larger companies, per Lori Calvasina of RBC Capital, as quoted on Yahoo Finance. However, Calvasina points out that RBC's research indicates that about 40% of the small caps’ debt is scheduled to mature over the next two to five years. This means several small-cap stocks may adapt to evolving interest rate environments, especially given that the Fed may begin cutting interest rates at some point in 2024.
Interest Rate Outlook and Historical Comparisons
Lori Calvasina also drew attention to the broader interest rate environment and indicated that even if interest rates have risen this year, they have been rising from a much lower baseline than in past economic cycles. This aspect is often overlooked.
IMF Boosts U.S. Growth Forecast
The International Monetary Fund (IMF) recently boosted the U.S. growth forecast for 2023 while keeping the global outlook unchanged. The U.S. growth projection for this year was raised by 0.3 percentage points from its July update to 2.1%. The IMF hiked next year’s forecast by 0.5 percentage points to 1.5%. For the Eurozone, the IMF cut the forecast by 0.2 percentage points to 0.7% for 2023 and by 0.3 percentage points to 1.2% for 2024, per CNBC.
Better-than-expected U.S. economic recovery is a plus for small-cap stocks. Since small-cap stocks are closely tied to the domestic economy, an uptick in the economic outlook bodes well. These stocks are not heavily export-centric and, hence, do not get battered if the greenback rises.
Resilient U.S. Consumers
Despite sticky inflation, U.S. consumers have been showing strong resilience. Retail sales in the United States grew 0.7% sequentially in September 2023, following an upwardly revised 0.8% uptick in August and beating forecasts of a 0.3% advance. The data continues to indicate robust consumer spending despite high prices and borrowing costs. This is another positive for the small-cap space.
Geopolitical Tensions are Rife
The war between Gaza and Israel has been hitting the headlines. Due to the Middle East tensions, safe-haven assets jumped last month. If the war is not contained soon, the global markets may face a chaotic situation in the ongoing fourth quarter. Against this background, pivoting toward domestic equities could prove to be an intriguing idea.
Cheaper Valuation of Small-Caps
The Russell 2000 hasn't been this cheap compared to the S&P 500 since the tech bubble in the late 1990s into the early 2000s, per RBC Capital, as quoted on Yahoo Finance. As a result, investors can bet on small-cap ETFs that have a lower P/E than the S&P 500’s P/E of 17.86X.
Small-Cap Value Stocks to Buy
Against this backdrop, below we highlight a few small-cap stocks that have a Zacks Rank #1 (Strong Buy) or #2 (Buy), an upbeat Value Score of “A” or “B” and have seen the Zacks Consensus Estimate for EPS rising by at least 2% in the past four weeks.
Lifetime Brands (LCUT - Free Report)
The Zacks Rank #1 company is a leading designer, marketer and distributor of kitchenware, cutlery & cutting boards, bakeware & cookware, pantryware & spices, tabletop and bath accessories. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 3.33% in the past month. Its Value Score is A.
Ryerson (RYI - Free Report)
The Zacks Rank #1 company processes and distributes metals. The company, through its subsidiaries, purchases, processes and distributes various forms of stainless steel, aluminum, carbon, alloy steel, nickel and red metals.
The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 3.33% in the past month. The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 9.09% in the past month. Its Value Score is A.
Strattec Security (STRT - Free Report)
The Zacks Rank #2 company designs, develops, manufactures and markets mechanical locks, electro-mechanical locks and related products for automotive manufacturers with operations in the United States, Canada and Mexico.
The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 3.33% in the past month. The Zacks Consensus Estimate for the upcoming fiscal year’s earnings per share has risen from a loss of 10 cents to a gain of $0.86 in the past month. Its Value Score is A.
Comtech Telecommunications (CMTL - Free Report)
The Zacks Rank #2 company designs, develops, produces and markets innovative products, systems and services for advanced communications solutions. The company sells products to a diverse customer base in the global commercial and government communications markets.
The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 53.85% in the past month. Its Value Score is B.
The Marcus (MCS - Free Report)
The Zacks Rank #2 company engages in the lodging and entertainment industries. It operates through two segments: Movie Theatres, and Hotels and Resorts. The company's movie theatre division owns or manages screens at locations in several states, as well as a family entertainment center.
The Zacks Consensus Estimate for this fiscal year’s earnings per share has risen by 13.21% in the past month. Its Value Score is A.