Year 2018 started with quite a lot of possibilities, particularly for aggressive investors on account of a growing economy and optimism surrounding items like bitcoin and blockchain.
The solid performance of small-cap stocks continued past the middle of the year with the Russell 2000 Index (which is broadly considered for measuring the performance of small-cap stocks) reaching an all-time high of $1740.75 on Aug 31, delivering 12.3% year-to-date return and topping the large-cap benchmark return of 9%. The small cap S&P 600 Index too exhibited an impressive outcome with 16.5% gain for the said period.
However, things started to turn sour once the initial optimism around blockchain began to disappear. Also, the gradual winding down of America First trade worsened the position of domestically-focused businesses. Going by an article published in BARRON’S, according to Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, “Mounting cost pressures and concerns over slowing growth led many investors to simply lose faith in small-cap profit margins and earnings expectations.”
Accordingly, the stellar performers of the first half literally fell flat on their face. Russell 2000 has plummeted a significant 18.8% over the past three and a half months. This unprecedented reversal has made 2018 different from any other recent year.
Investors were not much hopeful about the prospects of small-cap stocks in 2019 until a recent projection. BARRON’S stated, “Wall Street’s consensus estimate still calls for small-cap earnings to grow by 19.2% in 2019, compared with 2018’s 23.8%”. The upcoming year is expected to bring modest recovery for small caps, thanks to U.S.-China trade war, corporate tax cuts and rising earnings. Let us delve deeper.
Three Major Factors That Can Boost Small-Cap Stocks in 2019
Trade War Dispute: With no indication of any near-term respite from the ongoing U.S.-China Tariff tension, investors are now gradually shifting their focus to smaller domestic companies from large caps with huge overseas base. With their minimum exposure to overseas market, small-cap stocks definitely have a comparative advantage over large-cap stocks.
Corporate Tax Cut: The latest Tax Cuts and Jobs Act, which among many other changes slashed corporate tax rates to 21% from the earlier 35%, provided impetus to the small-cap market. Prior to the tax cut, the small-cap firms had to bear the brunt of a higher effective tax rate compared to large caps that have a formidable portion of their income outside. As published in Forbes, Martin Jarzebowski, a portfolio manager at the Federated Clover Small Cap Value fund stated that, “going into 2019, the forward expectations are that the small cap universe is going to see accelerating earnings growth, whereas the large caps in general are still going to be growing but they won’t see a benefit as magnified.”
Oil Price to Stay Stable in 2019: Crude oil prices are recovering fast after plummeting to its lowest level of 2018 in November. According to market watchers, given OPEC’s recent decision of production cut and with global oil demand remaining firm, there are high chances that crude oil prices may go up in 2019. Any recovery in oil prices can also play an important role in leading the broader stock market and of course small-cap stocks higher this year.
4 Top-Ranked Small-Cap Stocks to Prosper in 2019
Let us focus on a few small-cap stocks, which are likely to garner solid returns for investors in 2019. We have zeroed in on four such stocks using the Zacks Stock Screener. Notably, each of these stocks has a market cap of less than $1 billion and carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Additionally, 2019 earnings estimates for all these stocks have increased more than 50% year to date.
Marchex, Inc. MCHX: This call analytics company provides solutions that help its users drive more calls, understand what happens on those calls, and convert more of those callers into customers. Marchex’ recent acquisition of call monitoring company, Callcap is expected to create one of the largest conversation analytics companies across both voice and text solutions.
This Zacks Rank #2 (Buy) stock has an expected earnings growth rate of 250% for the upcoming fiscal compared with the industry’s mere 5.9%. The one-year price-to-sales (P/S) ratio for the next fiscal is 1.16, lower than the industry average of 6.53. A favorable P/S ratio and strong growth prospect suggest that the stock still has scope to yield higher returns next year.
Valeritas Holdings, Inc. : This is a commercial-stage medical technology company that develops and commercializes innovative technologies focused on diabetes management. Banking on its consistent improvement in sales force productivity, the company is progressing well with its strategic focus to provide patients with a higher level of service resulting in increased prescriptions. This strategic shift, implemented in 2017, has demonstrated excellent results in 2018 and the trend is expected to continue through 2019.
This Zacks Rank #2 company has an expected earnings growth rate of 61.5% for the next fiscal, higher than the industry’s growth rate of 13%. The P/S ratio for the next financial year (F2) is 0.25, lower than the industry average of 3.21. These strong fundamentals indicate that the stock has the potential to extend its rally in the next year.
AMERI Holdings, Inc. AMRH: This Zacks Rank #2 company is a provider of SAP cloud and digital enterprise services worldwide. The market is looking forward to the company’s recently-entered partnership with The Glimpse Group. The alliance is expected to develop an innovative corporate learning platform to enhance value proposition of Ameri100’s solutions offering portfolio through the use of Glimpse’s Virtual & Augmented Reality software and services. This is expected to drive demand for the company’s higher margin SAP solutions offerings going forward.
The company has an expected earnings growth of 666.7% for the next year compared with the industry’s growth rate of 80.9%. The P/S ratio for the next financial year is 0.18, lower than the industry average of 1.77. These signal that the stock is poised to perform well in 2019 too.
GSV Capital Corp. GSVC: This is a publicly traded investment fund that seeks to invest in high-growth, venture-backed private companies. The company has developed a portfolio and pipeline of leading, late-stage venture-backed companies with strong operating fundamentals and has potential for scaled valuation growth. The stock also carries a Zacks Rank #2.
GSV Capital has an expected earnings growth of 23.2% for the next year compared with the industry’s growth rate of only 6.9%. The P/E ratio for the next financial year is 7, lower than the industry average of 9.06.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
These 10 are painstakingly handpicked from over 4,000 companies covered by the Zacks Rank. They are our primary picks poised to outperform in the year ahead. Be among the first to see the new Zacks Top 10 Stocks >>