Back to top

Russell 2000 Outruns Larger Peers: 5 Small-Cap Stocks to Buy

Read MoreHide Full Article

Wall Street’s smaller names are outpacing the heavyweights, of late. This lifted the small-cap-based Russell 2000 (RUTX) index to above its best close early Monday, for the first time in nearly four months.

The corporate tax cut enacted in December, domestic economic growth and a strengthening U.S. dollar are fueling the surge in small business sentiment. The American economy will likely grow more when the full impact of increased government spending and tax cuts will be materialized.

Against this backdrop, investors can make the most of this opportunity to bet on the top-ranked U.S. focused small-cap stocks for alluring returns.

Russell 2000 Touches Roof

Small-cap stocks are presently shining over their stubbornly range-bound large-cap peers. From the start of 2018 through this Monday, the Russell moved up 4.2%, better than 2.1% and 0.7% growth recorded by the S&P 500 and Dow Jones Industrial Average, respectively.

Notably, over the past three months, the Russell has rallied nearly 8%, outpacing 0.11% growth recorded by the Nasdaq Composite Index, 1.5% yield of the Dow Jones Industrial Average and 3% gain marked by the S&P 500 group.

Insulated From Overseas Headwinds

Small-cap stocks are shielded from headwinds confronted by the large caps in foreign-end markets. Having minimal international exposure, these companies are largely devoid of currency, geopolitical and trade-related issues.

For instance, appreciation of dollar is currently boding well with the U.S. focused small-cap companies. The ICE Dollar Index (DXY) was up 0.7% to $92.82 in yesterday’s trading, hitting a four-day high. The FactSet data revealed that the currency gauge this Tuesday marked the highest daily performance in seven weeks. Dollar had also gained when Trump decided to exit the Iran deal on May 8. Going forward, the greenback’s strength is likely to support the ongoing growth trajectory of small-cap stocks.

Furthermore, ongoing trade tensions between America and China are favoring investors’ appetite for small-cap stocks. Reports on Tuesday indicated that the two countries still remain “very far apart” in resolving trade discrepancies, according to the U.S. Ambassador to China Terry Branstad. The U.S. Commerce Secretary Ross also made a similar comment about the state of trade talks between Beijing and Washington on Monday.

Rallying on Domestic Economic Boom

Enjoying the full employment status quo, the U.S. economy is presently showcasing remarkable strength in both business and consumer confidence. Furthermore, the Tax Cuts and Jobs Act is lifting the profitability of every American company.

So, the small-cap companies are likely to gain more from the domestic economic upliftment. “When the economy is stronger than normal, small caps do better” —  per an LPL Financial analyst.

Furthermore, last week’s report released by The National Federation of Independent Business revealed historic historic highs for small corporate and optimism. Lower regulatory barriers, an upbeat job market picture and increased consumer spending are currently driving small business confidence.  

5 Hot Small-Cap Picks

The equity universe is currently stabilizing and economic data has mostly been favorable. At this juncture, investors with a higher risk appetite and return expectations can make the most by apportioning their hard-earned money in small-cap stocks.

In sync with the trend, we have handpicked five top-ranked small-cap stocks with a market cap of below $1 billion that will likely add a sparkle to your portfolio.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.  

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Federated National Holding Company (FNHC - Free Report) engages in insurance distribution, underwriting and claims processing business.

The Zacks Consensus Estimate for earnings has moved up 12.5% to $2.25 per share for 2018, in the last 30 days. Notably, the projected year-over-year earnings growth rate for this Florida-based company is currently pegged at 275% and 17.8% for 2018 and 2019, respectively. Federated National’s shares have gained 20.8% in the past month.  

Delta Apparel, Inc. (DLA - Free Report) designs, produces and markets different types of branded active wear and lifestyle basic apparel, and other accessory products.

The Zacks Consensus Estimate for earnings has moved up 11.1% to $1.50 per share for fiscal 2018 (ending September 2018), in the last 30 days. Notably, the projected year-over-year earnings growth rate for this Carolina-based company is currently pegged at 12.8% and 16.7% for fiscal 2018 and 2019, respectively. Over the past month, the stock has rallied 0.4%.

Turtle Beach Corporation (HEAR - Free Report) is a premium California-based audio technology company.  

The Zacks Consensus Estimate for earnings has moved up 162.2% to 97 cents per share for 2018, in the last 30 days. Notably, the projected year-over-year earnings growth rate for the company is currently pegged at 504.2% and 24.2% for 2018 and 2019, respectively. Over the past month, shares of the company have gained 324.3%.

Stoneridge, Inc. (SRI - Free Report) manufactures and designs electronic and engineered electrical modules, components, and systems in the market.

The Zacks Consensus Estimate for earnings has moved up 5.1% to $2.07 per share for 2018, in the last 30 days. Notably, the projected year-over-year earnings growth rate for the company currently stands at 31.9% and 7.6% for 2018 and 2019, respectively. Shares of this Michigan-based company have gained 5.3% in the past month.  

Rocky Brands, Inc. (RCKY - Free Report) designs, manufactures and sells apparel and footwear in the market.

The Zacks Consensus Estimate for earnings has moved up 7.1% to $1.50 per share for 2018, in the last 30 days. Notably, the projected year-over-year earnings growth rate for the company is currently 29.3% and 10% for 2018 and 2019, respectively. Shares of this Ohio-based company have gained 26.6% in the past month.  

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>



More from Zacks Analyst Blog

You May Like

Published in