Small-cap stocks have emerged as diamonds in the rough pushing aside the large-cap stocks in 2018. The volatility which commenced in February has taken its toll on the large-cap stocks but small-cap have slowly achieved a milestone in the meantime. Russell 2000 (RUTX), the benchmark index of U.S. small-cap stocks, scaled an all-time high on May 16.
Strong fundamentals of the U.S. economy, massive tax-cut and business friendly policies adopted by the Trump administration along with immunization from external disturbances have raised these stocks’ popularity. At this stage, investment in the top-ranked U.S. focused small-cap stocks will be a prudent move.
Russell Achieves All Time High
On Wednesday, the Russell 2000 touched an all-time high of 1620.64 before closing at a record level of 1616.37. This represents a gain of 1% or 16.03 points in a single day.
Over the last three months, the Russell 2000 increased nearly 8%, outperforming the Dow 30, S&P 500 and Nasdaq Composite, which gained 1.5%, 3% and 6.8%, respectively.
Immune to External Disturbances
A major characteristic of small-cap stocks is that these are mostly immune to any international geopolitical disturbance or global economic fluctuations which are the primary reasons of volatility in the U.S. stock markets.
Notably, the lingering trade conflict between the United States and China led to the imposition of tariffs and retaliatory tariffs generating systematic volatility affecting mainly the large-cap stocks. To add to the woe, the United States – North Korea conflict may escalate in coming months. Moreover, geopolitical tensions in the Middle East are a persistent cause of fluctuations in large-cap stocks.
Domestic Economy Focused
One typical characteristic of small-cap stocks is that the United States is the main market for their products. The U.S. economy is currently on a strong footing. Both consumer and business confidence remains healthy.
Furthermore, the value of the U.S. dollar is rising for the last four months making U.S. exports of large companies uncompetitive in the global market. Since small-cap corporates sold most of their products to indigenous customers, these have remained unaffected by foreign exchange volatility.
Tax Overhaul: A Major Boost
The two pro-growth agendas of President Trump, namely, significant cut in corporate tax and deregulation are major catalysts to small-cap stocks. The corporate tax rate was recently lowered from 35% to 21%.
Small-cap corporates book most of their revenues in the homeland. Consequently, a significant reduction in corporate tax rate would be immediately accretive to cash flow of these companies.
Our Top Picks
The small-cap segment of the broader market has been outperforming in 2018 defying extremely volatility. At this stage, investors with a higher risk appetite and return expectations can make the most by investing in small-cap stocks. However, picking winning stocks can be a difficult task.
This is where our VGM Score comes in handy. 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 the 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 narrowed down our search on five stocks with a market cap of below $1 billion. Each of these stock have a Zacks Rank #1 (Strong Buy) and VGM Score A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Chart below depicts price performance of our five picks year to date.
Federated National Holding Co. (FNHC - Free Report) engages in insurance distribution, underwriting and claims processing business. It has expected earnings growth of 275% for current year. The Zacks Consensus Estimate for the current year has improved by 12.5% over the last 30 days.
Delta Apparel Inc. (DLA - Free Report) designs, produces and markets different types of branded active wear and lifestyle basic apparel, and other accessory products. It has expected earnings growth of 12.8% for current year. The Zacks Consensus Estimate for the current year has improved by 10.3% over the last 30 days.
Turtle Beach Corp. (HEAR - Free Report) is a premium California-based audio technology company. It has expected earnings growth of 504.2% for current year. The Zacks Consensus Estimate for the current year has improved by 162.2% over the last 30 days.
Stoneridge Inc. (SRI - Free Report) manufactures and designs electronic as well as engineered electrical modules, components, and systems in the market. It has expected earnings growth of 31.9% for current year. The Zacks Consensus Estimate for the current year has improved by 5.1% over the last 30 days.
Rocky Brands Inc. (RCKY - Free Report) designs, manufactures and sells apparel and footwear in the market. It has expected earnings growth of 29.3% for current year. The Zacks Consensus Estimate for the current year has improved by 7.1% over the last 30 days.
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