U.S. stock markets have been witnessing a steady northbound journey since mid-October. The rally is likely to sustain in the near term on expectations of slowing inflation rate and a reduction in the magnitude of the interest rate hike by the Fed.
However, the overall performance of Wall Street this year remains disappointing. Just five weeks of trading are left to complete 2022, and the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — have tumbled 5.5%, 15.5% and 28.2%, respectively, year to date.
The situation remains the same for small-cap stocks also as the two benchmarks — the Russell 2000 and the S&P 600 — have tanked 16.8% and 12.25, respectively, year to date. Despite severe headwinds, a handful of small-cap (market capital < $1,000 million) stocks has provided astonishing returns so far this year. We have selected five such stocks with a favorable Zacks Rank that have more upside left.
These companies are Richardson Electronics Ltd. RELL, Amalgamated Financial Corp. AMAL, IBEX Ltd. IBEX, Universal Logistics Holdings Inc. ULH and MRC Global Inc. MRC.
Small Businesses Suffer the Most
The major issue for U.S. small businesses is galloping inflation, which is currently at its 40-year high. The global breakdown of supply-chain systems due to the pandemic and shortage of manpower has hurt these companies the most. Small businesses are unable to pass on the total hike in input costs to their final products deteriorating their financial conditions.
China is yet to recover fully from the resurgence of COVID-19. Moreover, the prolonged war between Russia and Ukraine has made inflation the worst. Prices of commodities, especially food, remain elevated due to the war.
The Fed has hiked the benchmark interest rate by 3.75% so far in 2022 with a 75 basis-point rise in the last four FOMC meetings. At present, the Fed fund rate is within the range of 3.75-4%. Small businesses are major sufferers of a higher interest rate regime.
Small businesses operate on a thin profit margin and most new businesses take time to achieve profitability. Moreover, these companies, have no geographical diversification and depends on U.S. consumers. Therefore, a slowdown of U.S. consumer spending is likely to hurt small industries the most.
Although the Fed is yet to signal any shift from its ultra-hawkish monetary policies, a section of Fed officials has recently spoken in a relatively dovish tone. The minutes of the Fed’s November FOMC meeting revealed that a “substantial majority” of Fed officials favor reducing the magnitude of the interest rate hike going forward.
At present, per the CME FedWatch, there exists a 73.5% probability that the central bank will reduce the magnitude of rate hike to 50 basis points in the December FOMC. With several important Fed officials recently expressing their dovish views, market participants are unsure of whether the terminal interest rate will cross the 5% threshold or stay below that.
Moreover, U.S. GDP grew 2.6% in the third quarter, beating the consensus estimate of 2.2%. This is important because the economy contracted in the first two quarters of this year, compelling a large section of economists and financial experts to warn of a recession.
Our Top Picks
We have narrowed our search to five small cap stocks that have provided more than 55% returns year to date. These stocks have positive growth potential for the rest of 2022 and have seen solid earnings estimate revisions in the last 60 days. Finally, each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
Richardson Electronics is a global provider of Engineered Solutions, serving the RF, Wireless & Power Conversion; Electron Device; Security; and Display Systems markets. RELL delivers engineered solutions for its customers' needs through product manufacturing, systems integration, prototype design and manufacture, testing and logistics.
Richardson Electronics has expected earnings growth of 28.4% for the current year (ending May 2023). The Zacks Consensus Estimate for its current-year earnings has improved 22.4% over the last 60 days. The stock price of RELL has jumped 96.3% year to date.
Amalgamated Financial operates as the bank holding company for Amalgamated Bank that provides commercial and retail banking, investment management, and trust and custody services for commercial and retail customers in the United States.
AMAL accepts various deposit products, including non-interest bearing accounts, interest-bearing demand products, savings accounts, money market accounts, NOW accounts, and certificates of deposit.
Amalgamated Financial has expected earnings growth of 51.7% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 5.2% over the last 30 days. The stock price of AMAL has rallied 57.6% year to date.
IBEX provides end-to-end technology-enabled customer lifecycle experience solutions in the United States and internationally. IBEX offers customer support, technical support, inbound and outbound sales, business intelligence and analytics, digital demand generation and CX surveys and feedback analytics service. Its major products are ibex Connect, ibex Digital and ibex CX.
IBEX has an expected earnings growth rate of 11.4% for the current fiscal year (ending June 2023). The Zacks Consensus Estimate for next-year earnings has improved 2.8% over the last 30 days. The stock price of IBEX has soared 97.5% year to date.
Universal Logistics is a provider of customized transportation and logistics solutions. ULH offers services across their entire supply chain, including truckload, brokerage, intermodal, dedicated and value-added services.
Universal Logistics has an expected earnings growth rate of 98.8% for the current fiscal year. The Zacks Consensus Estimate for next-year earnings has improved 10.3% over the last 30 days. The stock price of ULH has climbed 94.6% year to date.
MRC Global is one of the leading distributors of pipes, valves and fittings (PVF), and related products and services. MRC’s products are used across upstream, midstream and downstream sectors of the oil and gas industry.
Additionally, MRC provides services like product testing, manufacturer assessment, volume purchasing, technical support, truck stocking, order consolidation, product tagging and system interfaces, meeting customer and supplier requirements.
MRC Global has an expected earnings growth rate of more than 100% for the current fiscal year. The Zacks Consensus Estimate for next-year earnings has improved 16.2% over the last 30 days. The stock price of MRC has surged 69.2% year to date.
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