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Small Caps Bounce Back: Buy 5 Stocks With Strong Balance Sheet

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Last week was eventful for Wall Street with WTI oil’s May contract diving to the negative territory for the first time in history to start the week. Weak demand emanating from coronavirus-led lockdowns, ample supplies despite the biggest OPEC output cut deal and most importantly storage crisis led to huge selloffs in the oil patch.

Though oil recovered at the end of the last week, key large-cap U.S. indexes — the Dow, the S&P 500 and the Nasdaq — lost 1.9%, 1.3% and 0.2%, respectively. The declines marked the first losing week for the key U.S. equity gauges of the past three weeks, as quoted on MarketWatch. Only small-cap index Russell 2000 recorded a 0.3% weekly gain.

Coronavirus-led lockdowns and shutting down of businesses are causing a severe cash crunch among companies. Small caps with a weak balance sheet have faced the crisis even more. However, more compelling valuation, relative underperformance compared to large caps, a super-dovish Fed and the U.S. government’s gigantic aid to help small-and-mid-sized companies amid coronavirus have been driving the small-cap cohort lately.

What’s Behind the Latest Rebound in Small Caps?

There was already a $349 billion forgivable loan program in place. The loans at issue were being made through the Paycheck Protection Program, which offers up to $10 million in forgivable loans to businesses with 500 or fewer employees.

Plus, the government’s latest extension of the Paycheck Protection Program (PPP), which is called Phase 3.5, acted as a big tailwind. The program increases the PPP by an additional $321 billion. Plus, it has extra funding for disaster relief, hospitals and testing.

Since small-cap stocks are more closely tied to the domestic economy, they are likely to benefit more from the re-opening of the U.S. economy. President Trump revealed new guidelines on Apr 16 to help states ease their social distancing controls.

Then comes the Fed stimulus. The central bank has cut rates to zero. In early April, the Fed announced an investment of up to $2.3 trillion in loans to aid small and mid-sized businesses, and state and local governments as well as to fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities. The Fed’s Main Street Lending program can be considered as a positive for pint-sized stocks.

Investors should note that the greenback has gained this year. Invesco DB US Dollar Index Bullish Fund (UUP) is up 4.9% year to date and added 0.3% in the past five days despite massive monetary policy easing. The rising dollar environment lowers the gains of large caps with substantial foreign exposure and favor small-cap companies.

Small-Cap Stock Picks

Against this backdrop, we highlight a few small-cap stocks that carry a favorable Zacks Rank, come from favorable Zacks industries, have strength in their balance sheet and have been exhibiting solid pricing momentum.

In order to do so, we have selected a few small-cap stocks that have a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

The change in Zacks Consensus Estimate for the upcoming quarter’s earnings for these companies was greater than equal to zero in the past four weeks. These stocks boast a debt-equity ratio of less than one and a cash ratio of greater than equal to one.  

Airgain Inc. (AIRG - Free Report) Up 12.68% Past Week

The Zacks Rank #2 provider of embedded antenna technologies comes from a favorable Zacks industry (placed at the top 14% of total 250+ industries in the Zacks universe). The Zacks Consensus Estimate for its current-quarter earnings has not budged in the past month. The cash ratio and the debt-equity ratio of the company were 5.36x and zero, respectively.

Trilogy Metals Inc. (TMQ - Free Report) Up 13.51%

The Zacks Rank #1 metal exploration company belongs to a favorable Zacks industry (top 10%). The Zacks Consensus Estimate for its current-quarter’s earnings has not seen any negative movement over the past four weeks. The cash ratio and the debt-to-equity ratio of the company were 8.45x and 0.27x, respectively.

Aptinyx Inc. (APTX - Free Report) Up 16.1%

The Zacks Rank #2 bio-pharmaceutical company hails from a favorable Zacks industry (top 4%). Zacks Consensus Estimate for its current-quarter earnings has gone up 9.38% over the past four weeks. The cash ratio and the debt-to-equity ratio of the company were 21.4x and zero, respectively.

Veritone Inc. (VERI - Free Report) Up 7.22%

The Zacks Rank #2 artificial intelligence company hails from a favorable Zacks industry (top 21%). The Zacks Consensus Estimate for its current-quarter’s earnings has not moved over the past four weeks. The cash ratio and the debt-to-equity ratio of the company were 1.0x and zero, respectively.

Tufin Software Technologies Ltd. (TUFN - Free Report) Up 1.76%

The Zacks Rank #2 developer of security services comes from a favorable Zacks industry (top 21%). The Zacks Consensus Estimate for its current-quarter earnings has risen 1.76% over the past four weeks. The cash ratio and the debt-to-equity ratio of the company were 2.65x and zero, respectively.

Just Released: Zacks’ 7 Best Stocks for Today

Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.1% per year.

These 7 were selected because of their superior potential for immediate breakout.

See these time-sensitive tickers now >>