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5 Top Stocks to Buy as Small Business Optimism Rises

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In May, small business optimism increased substantially, bucking worries stemming from recent economic releases. A poor jobs report for the previous month had economists worried in particular since it dropped hints that the economic recovery is running out of steam. Strong hiring, investment and sales among small business clearly go against this logic.

Industry insiders feel that the small business side of the economy is now principally powering incremental growth. President Trump’s tax cuts have possibly benefited this segment of the economy the most.

Further, small business owners are enjoying the benefits of deregulation. Additionally, many of them are U.S.-focused and largely insulated from the prevailing trade tensions. This is why domestic focused small caps would make great additions to your portfolio.

Index Betters Pre-Shutdown Levels

On May 11, the National Federation of Independent Business (NFIB) revealed that its index for small business optimism had increased by 1.5 points to 105 in May, exceeding most estimates. Six of the index’s components improved, three were flat with last month and only one declined. The increase took the index to levels that exceed those witnessed before the government shutdown.

The percentage of business owners reporting capital outlays increased by six points to 64, the highest level registered since February 2018. Of these, 30% plan to invest in capital over the next few months. This is an increase of three points and close to historical records. Most small businesses plan to invest in transportation, construction, manufacturing and professional services.

Additionally, small businesses reported a net addition of 0.32 workers per firm. An overwhelming majority believes the inability to find qualified workers is their biggest problem. At the same time, 62% said that were hiring or attempting to hire new employees, a five point increase from last month’s level.

Gains From Tax Cuts, Deregulation Powering Sector

This latest report from the NFIB bucks the trend created by recent economic reports. Principal among these is May’s dismal jobs report which set off alarm bells about the economy. It also led to speculation that a rate cut is around the corner. Adding to the gloom was the fact that the report was based on data collected before U.S.-China trade relations worsened earlier this month.

Happily enough, small businesses appear unscathed by this trend. Economists believe small businesses have benefited the most from Trump’s tax cuts and deregulatory measures. Further, most of them conduct their businesses largely in the United States. This insulates them almost entirely from the ongoing trade war, which is already having a detrimental impact on the economy.

Our Choices

The increase in small business optimism comes as welcome relief for beleaguered investors, who have been receiving several dismal readouts on the economy. Last month’s jobs data in particular had most market watchers worried. But small businesses seem to be bucking this trend, buoyed by tax cuts and deregulation.

Investing in small-cap stocks looks prudent. 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, each of which has a Zacks Rank #1 (Strong Buy) VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes Dredge & Dock Corporation (GLDD - Free Report) is the largest provider of dredging services in the United States.

Great Lakes Dredge & Dock’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 47.8% over the last 60 days. The stock has gained 63.3% year to date.

Fly Leasing Limited (FLY - Free Report) is engaged in acquiring and leasing modern, high-demand and fuel-efficient commercial jet aircraft under long-term contracts to a diverse group of airlines throughout the world.

Fly Leasing’s projected growth rate for the current year is 36.3%. The Zacks Consensus Estimate for the current year has improved by 31.3% over the last 30 days. The stock has gained 55.5% year to date.

Construction Partners, Inc. (ROAD - Free Report) is an infrastructure and road construction company.

Construction Partners’ Zacks Consensus Estimate for the current year has improved by 4.3% over the last 30 days. The stock has gained 48.4% year to date.

Global Ship Lease, Inc. is a containership charter owner.

Global Ship Lease’s projected growth rate for the current year is 6.3%. The Zacks Consensus Estimate for the current year has improved by 3.3% over the last 30 days. The stock has gained 43.4% year to date.

Quanex Building Products Corporation (NX - Free Report) is a manufacturer of components sold to Original Equipment Manufacturers in the building products industry.

Quanex Building Products’ expected earnings growth for the current year is 30.8%. The Zacks Consensus Estimate for the current year has improved by 11.8% over the last 30 days. The stock has gained 23.4% year to date.

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