On Jun 12, the National Federation of Independent Business (NFIB) released data for its small-cap business optimism index, which rose to its highest level in May since 1983. The key metric also touched its second-best settlement since its inception 45 years ago. Strong domestic economy and Trump government’s tax codes supported these gains.
Small-cap stocks are believed to have a higher level of volatility compared with their large and mid-cap counterparts but provide comparatively better returns. Small-cap stocks have better growth prospects following strengthening business optimism and a low tax environment. Moreover, tariff-related uncertainty makes these mostly domestic-focused stocks wise investment choices.
Small Business Sentiment Index Near Record High
The NFIB small-business optimism index increased 3 points to 107.8 in May. Out of the 10 major components in the index, eight registered an increase, while one was unchanged.
Three key components of the index, which are higher sales prospects, a better economy and strong expansion plans rose 10%, 7% and 7%, respectively. Positive sales trends reached its best level since 1995, while expansion plans settled a 45-year high.
Moreover, employee compensation touched its highest settlement in 45 years, which in turn is projected to boost labor participation rate in small-cap businesses. Additionally, encouraging earnings trends also rose 3%, touching its best levels since 1973.
Trump’s Tariffs and Tax Cuts Help Small Caps
NFIB President Juanita Duggan said “main Street optimism is on a stratospheric trajectory” following recent regulatory changes and tax cuts. He added that easing regulations and lower taxes, along with a surge in “earnings and employee compensation,” will act as the key drivers to boost small businesses.
On May 31, President Trump slapped tariffs of 25% on steel imports and 10% on aluminum imports from allies Canada and Mexico as well as from the member countries of the European Union. It came into effect on Jun 1. This could create turbulence for large companies with multinational operations.
Moreover, Trump’s Tax Cuts and Jobs Act of 2017, permanently slashed corporate tax rates from 35% to 21%, which is a tailwind for small caps. Before the tax cut, the small-cap companies on the Russell 2000 index had to pay a median effective tax rate of 31.9%, which is around 4% higher than the same paid by S&P 500 components, according to Thomson Reuters.
Strong business sentiment, stronger domestic economy, upbeat jobs report and a low tax scenario bode well for small-cap stocks. Moreover, President Trump-induced tariff-related concerns are also good news for small-cap stocks.
Given this backdrop, it makes sense to bet on small-cap stocks, which are included on the Russell 2000 index. Notably, this prominent small-cap index has jumped 9.6% so far this year, which is considerably higher than the Dow’s increase of 2.4% and the S&P 500’s rise of 4.2% during the same period.
These five stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). However, picking winning stocks may be difficult. 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 based on a good Zacks Rank and VGM Score.
Covenant Transportation Group, Inc. (CVTI - Free Report) is a provider of truckload transportation and brokerage services primarily in the continental United States.
Covenant Transportation Group has a VGM Score of A. The expected earnings growth of the company for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved 6.7% over the last 30 days. Covenant Transportation Group has gained 24.5% in the past three months. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Shoe Carnival, Inc. (SCVL - Free Report) is a major family footwear retailer in the United States.
Shoe Carnival has a Zacks Rank #1 and VGM Score of B. The company has expected earnings growth of 35.9% for the current year. The Zacks Consensus Estimate for the current year has improved 5.2% over the last 30 days. Shoe Carnival has gained 44.5% in the past three months.
RCI Hospitality Holdings, Inc. (RICK - Free Report) is involved in the hospitality and related businesses in the United States.
RCI Hospitality Holdings has a Zacks Rank #2 and VGM Score of A. The company has expected earnings growth of 52.1% for the current year. The Zacks Consensus Estimate for the current year has improved 4.8% over the last 30 days. RCI Hospitality Holdings has gained 8.7% in the past three months.
Comtech Telecommunications Corp. (CMTL - Free Report) is a developer of products, systems, and services for communications solutions.
Comtech Telecommunications has a Zacks Rank #1 and VGM Score of B. The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 2.7% over the last 30 days. Comtech Telecommunications has gained 4.4% in the past three months.
Xcerra Corporation is a provider of test and handling capital equipment, interface products, and test fixtures to the semiconductor and related industries.
Xcerra has a Zacks Rank #2 and VGM Score of A. The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 4% over the last 30 days. Xcerra has gained 26.9% in the past three months.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>