By mid-January, it was more than evident that small caps were having their best year since 1987. The surge continued for the rest of the month and also persisted in February. But by mid-March, prospects for small caps were noticeably cloudier.
However, it may be too early to write off small caps for the year. With Europe and China showing signs of weakness, the domestic economy looks decidedly stronger. This will provide a big boost to small caps since they are mostly domestically focused.
Widespread optimism over the trade deal is another factor influencing investors to bet on higher risk categories like small caps. This is why it makes sense to bet on attractively priced small cap stocks since they are poised to surge even higher.
Surge in First Two Months, Slump in March
The Russell 2000 had gained more than 8% by Jan 18 this year, a far cry from last year, the worst for the category since 2008’s Great Recession. The index went on to gain 18% through Mar 1, even as the S&P 500 increased 12% over the same period.
In effect, small caps reaped the biggest dividends of this year’s equity market surge. However, in the last two weeks, the Russell 2000 lost more than 2%, even as the broader S&P 500 inched up around 0.5%.
The extent of their divergence has been the highest for the year and has coincided with some rather dismal economic data. In February, employers created the fewest jobs in 17 months. Further, the latest ISM survey showed that American manufacturing was growing at its slowest pace since Trump won the U.S. presidential election.
Economic Resilience, Trade Deal to Boost Small Caps
The naysayers are already claiming that the recent downturn in small caps presages the coming of a larger stock market debacle. But the fact is that it is too early to write off the small-cap category.
It is true that small caps are more domestically focused than their S&P 500 counterparts, whose members garner around 40% of their revenues from overseas. They are therefore decidedly more susceptible to domestic economic weaknesses, which have been witnessed off late.
But it is also true that the U.S. economy has shown great resilience even when other major economies are struggling. While several S&P 500 companies have raised concerns about Europe and China in their fourth quarter transcripts, no such worries about the United States have been forthcoming.
Domestic economic strength is also evident from the latest reading of the University of Michigan consumer sentiment index, which rose to 97.8 in February. Further, an uptick in risk-taking propensity was witnessed on last Friday.
This was primarily due to fresh optimism about a trade deal which could provide new life to a long-running market rally. The positive sentiment was primarily generated by Trump’s latest statement about a “very responsible and reasonable China”. This in turn would also go on to boost riskier categories like small caps.
The recent weakness in small caps detracts in no way from the fact that the category has enjoyed an excellent run for much of the year. The domestic economy has shown great resilience at a time when other major economies are facing several problems. This should provide a major boost to such a domestically focused category.
Additionally, there is fresh optimism over a trade deal between the United States and China. This could breathe new life into a market rally, increasing the risk-taking propensity of investors. This would also be beneficial for a category like small caps.
We have selected stocks which are priced below $20 and have enjoyed strong gains year to date. 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) and a good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here .
TESSCO Technologies Incorporated TESS is a leading provider of products and solutions required to build, operate, maintain and use wireless voice, data, messaging, location tracking and Internet systems in the United States.
TESSCO Technologies has a VGM Score of A. The stock has gained 29.8% year to date. Its last closing price is $15.57.
Plymouth Industrial REIT, Inc. PLYM is a full service, vertically integrated real estate investment company.
Plymouth Industrial REIT has a VGM Score of A. The stock has gained 27.3% year to date. Its last closing price is $16.05.
Great Lakes Dredge & Dock Corporation GLDD is a U.S.-based provider of dredging services.
Great Lakes Dredge & Dock has a VGM Score of B. The stock has gained 26.7% year to date. Its last closing price is $8.39.
CrossAmerica Partners LP CAPL engages in the wholesale distribution of motor fuels, and owns and leases real estate used in the retail distribution of motor fuels in the United States.
CrossAmerica Partners has a VGM Score of A. The stock has gained 24.9% year to date. Its last closing price is $17.68.
Unisys Corporation UIS is an IT firm, specializing in securing client operations, increasing efficiency of data centers, enhancing support to their end users and constituents and modernizing their enterprise applications.
Unisys has a VGM Score of B. The stock has gained 14.9% year to date. Its last closing price is $13.36.
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