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5 Tiny Stocks on a Tear as Trade War Concerns Loom Large

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President Trump has threatened a trade war with China by restricting their investments in specific U.S. sectors. He has also pledged to impose steep tariffs on all U.S. imports of European Union assembled cars.

Though uneasiness about trade war has spiked again, small-capitalization stocks remain fairly immune to the effects. But, it’s a subset of small-cap equities that are poised to do much better as they have higher domestic revenue exposure, which is no doubt a hedge against trade issues.

U.S. Plans Curbs on China Investments

The White House has decided to curb Chinese investments in sensitive U.S. industries. Such companies include new-energy vehicles, robotics and aerospace, to name a few. The restrictions may, especially, apply to Chinese investments in venture capital funds, which provide much of the funds required by U.S. technology start-ups.

This has escalated chances of a trade war with Beijing. The move could even have long-term consequences on the economic relationship between the world’s largest economies. China’s foreign direct investment in the United States has tanked more than 90% to just $1.8 billion in the first half of this year compared to the same period last year. Lest we forget, Chinese companies had made a whopping $46 billion in foreign direct investments in the United States in 2016.

U.S.-China Trade Spat Hits Fever Pitch

Trump has ordered the U.S. Treasury to draft such restrictions and release them this week. This will follow the $50-billion tariff announced on Chinese items aimed at compelling the Asian nation to mend its intellectual property practices. The tariffs will be passed in two phases. More than 800 Chinese exports, worth $34 billion, will be subject to tariffs beginning July and another 280 or so will go through a public comment period and take effect later.

If China retaliates against such U.S. trade policies, the White House will impose tariffs of 10% on additional $400 billion of Chinese imports. Trump had earlier said that “the United States will no longer be taken advantage of on trade by China and other countries in the world” and that the United States “will continue using all available tools to create a better and fairer trading system for all Americans.”

China Warns Trade War Could Trigger Global Recession

China, in return, vowed to oppose trade protectionism and unilateralism. It remains hell-bent on bumping up tariffs on $50 billion worth of U.S. exports and accused the United States for ratcheting a trade war.

Vice Premier Liu He, President Xi Jinping’s top economic adviser, in fact, said that China and European Union have agreed to defend the multilateral trading system. He said that “China and the European Union think these actions may bring recession and turbulence to the global economy.”

After all, the European bloc has also come under severe pressure from Trump on trade. The European Union had imposed tariffs worth $3.3 billion on American goods in response to U.S. tariffs on imports of steel and aluminum products.

Small Caps Outperform But Tiny Companies Have Done Better

As fears of a global trade war intensify, small-capitalization stocks have largely outperformed large caps. And why not? These stocks have high domestic exposure in terms of revenue generation, which shields them from international disputes.

The Russell 2000 index, the benchmark for small caps, derives 78.6% of revenues from the United States, while large-cap benchmarks like the Dow fetches just 52.8% from the United States. While the Russell 2000 has gained 8.7% so far this year, the blue-chip index declined 1.4%.

Having said that, a sub-set of small-cap equities has performed even better this year. The Russell Microcap Index, which consists of companies with market value of around $730 million, has risen 14% so far this year. The companies in the Russell 2000 mostly have companies with an average market value of $2.6 million. So, smaller the company, the better the return amid trade war fears.

5 Solid Choices

Thanks to the aforesaid positive trend, we have selected five such micro-cap companies that should now make meaning additions to your portfolio. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Beazer Homes USA, Inc. (BZH - Free Report) operates as a homebuilder in the United States. The stock currently has a Zacks Rank #2 and a VGM Score of A. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings increased 3.1% in the same period. The company’s expected earnings growth rate for the current quarter is 78.3% compared with the Building Products - Home Builders industry’s estimated rally of 43.2%.

Town Sports International Holdings, Inc. (CLUB - Free Report) owns and operates fitness clubs in the Northeast and Mid-Atlantic regions of the United States. The stock currently has a Zacks Rank #2 and a VGM Score of A. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 19% in the same period. The company’s expected earnings growth rate for the current quarter is 300%, in contrast to the Leisure and Recreation Services industry’s projected decline of 26.7%.

First Financial Northwest, Inc. (FFNW - Free Report) operates as the holding company for First Financial Northwest Bank that provides commercial banking services in Washington. The stock currently has a Zacks Rank #1 and a VGM Score of B. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings jumped 39.8% in the same period. The company’s expected earnings growth rate for the current quarter is 66.7% compared with the Banks - West industry’s estimated rally of 23.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Shoe Carnival, Inc. (SCVL - Free Report) operates as a family footwear retailer in the United States. The stock currently has a Zacks Rank #1 and a VGM Score of B. In the last 60 days, two earnings estimates moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings advanced 5.7% in the same period. The company’s expected earnings growth rate for the current quarter is 133.3%, in contrast to the Retail - Apparel and Shoes industry’s projected decline of 43.9%.

Tilly's, Inc. (TLYS - Free Report) retails casual apparel, footwear, and accessories for young men and women, and boys and girls in the United States. The stock currently has a Zacks Rank #2 and a VGM Score of A. In the last 60 days, three earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 16.7% in the same period. The company’s expected earnings growth rate for the current quarter is 136.4%, in contrast to the Retail - Apparel and Shoes industry’s estimated decline of 43.9%.

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