The White House will possibly bring in additional tax cuts to expedite domestic economic growth. Donald Trump hinted at a speech on Tuesday that his administration would be “submitting additional tax cuts sometime prior to November.”
Midterm elections are on the way and the President seems to be on a campaign mode, hitting upon means to remind citizens about his memorable legislative victory and cashing in on his trump card.
After the bill that was enacted in December, a fresh round of tax cuts will likely favor U.S.-focused companies. Especially, eyeing the strength of the small-cap-based Russell 2000 index, we notice a surge in small business sentiment.
Trump’s tax overhaul policy will be helpful for every U.S. company but the biggest gains will be booked by the smallest names from Wall Street.
Against this backdrop, investment in small-cap stocks with high domestic exposure seems sensible.
How Firms Are Using their Tax Cut Money?
Trump’s $1.5 trillion Tax Cuts and Jobs Act slashed corporate tax rates from 35% to 21% and offered an additional tax break on repatriated overseas profits of the U.S. corporations. The signature legislative plan strengthened liquidity of the American businesses and facilitated in job creation.
Companies enjoyed blockbuster earnings in this Q1 session and amplified growth-based investments due to lower corporate taxes. Capital expenditure of all the S&P 500 companies stroked a record high in the reported quarter soaring 21% year over year. Business spending and nonresidential fixed investment climbed 6.1% during the January-March quarter, while expenses on equipment like tractors and new tools rose by 4.7%. Some businesses have also deleveraged balance sheets with the tax cut money.
Additionally, the Republican tax overhaul created millions of one-time bonuses for the U.S. workforce and gave rise to some wage hikes. Remarkably, the windfall enriched shareholders with record-shattering dividend and share buyback offers. Companies in the benchmark index repurchased $178 billion of stock in the first three months of this year.
Given these positives, we certainly believe that fresh tax cuts will be a boon for U.S. companies. The President has not yet presented any details about the new policy but affirmed his plans to meet Kevin Brady, chairman of the House Ways and Means Committee, which prepares tax legislation.
Lower Taxes to Spark Investment Boom
The absolute benefit of lower corporate taxes has not yet materialized. Going forward, tax cuts will likely speed up investments in factories, new equipment and other corporate projects. “Big-ticket projects take planning, engineering and sometimes architectural drawings” — per a senior economist of Ameriprise Financial.
Furthermore, gains are expected going forward too as many businesses have been holding back investments due to input price inflation, shortage of skilled workers and growing trade anxiety with China.
Nevertheless, corporate investments will gain momentum as the U.S.-Beijing trade war has taken a back seat of late, and the Conference Board has indicated a downfall in unemployment rolls to its lowest level since 1973.
In this context, small-capitalization stocks have more room to run going forward. Having minimal international exposure, these companies are shielded from headwinds confronted by blue-chip multinationals in foreign-end markets. Also, a solid U.S. economic status quo will support the small-cap rally. The Russell 2000 index has gained nearly 7% this year and is trading at an all-time high. Notably, earnings from these companies are predicted to improve over 40% this year and 23% in 2019.
5 Solid Picks
Given the bullishness, investing in domestic-oriented stocks seems the right thing to do now. We have picked five small-caps that should be meaningful additions to your portfolio. These stocks sport a Zacks Rank #1 (Strong Buy) or #2 and flaunt a VGM Score of A or B.
Delta Apparel, Inc. (DLA - Free Report) designs, manufactures and sells branded active wear as well as lifestyle basis apparel and related accessories.
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 South Carolina-based company is currently pegged at 12.8% and 16.7% for fiscal 2018 and 2019, respectively. Delta Apparel’s shares have gained 3.2% in the past month. The company sports a Zacks Rank #1 and VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here..
Rocky Brands, Inc. (RCKY - Free Report) designs, manufactures and sells apparel and footwear in the market.
The company sports a Zacks Rank #1 and VGM Score of A. 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 12.6% in the past month.
MYR Group Inc. (MYRG - Free Report) offers electrical construction services in the United States and Canada.
The company sports a Zacks Rank #1 and VGM Score of A. The Zacks Consensus Estimate for earnings has moved up 5.7% to $2.03 per share for 2018, in the last 30 days. Notably, the projected year-over-year earnings growth rate for the company is currently 150.6% and 18% for 2018 and 2019, respectively. Shares of this Illinois-based company have gained 24.7% in the past month.
Federated National Holding Company (FNHC - Free Report) engages in insurance distribution, underwriting, and claims processing business in the United States.
The company has a Zacks Rank #1 and VGM Score of B. 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 the company is currently 275% and 17.8% for 2018 and 2019, respectively. Shares of this Florida-based company have gained 31.4% in the past month.
Kforce Inc. (KFRC - Free Report) offers professional staffing solutions and services in the United States and other overseas end-markets.
The company carries a Zacks Rank #1 and has VGM Score of A. The Zacks Consensus Estimate for earnings has moved up 2.3% to $2.20 per share for 2018, in the last 30 days. Notably, the projected year-over-year earnings growth rate for the company is currently 40.1% for 2018 and 14.9% for 2019. Shares of this Florida-based company have gained 18.8% in the past month.
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