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5 Underperforming Small-Cap Stocks Ready to Explode in 2020

Rajani Lohia

The U.S. equity markets have performed well so far in 2019, making investors optimistic about a record-high close to the year on positive developments in U.S.-China trade relations and strong economic activity. Events like the Federal Reserve’s decision to cut rates thrice this year, easing of the U.S.-China trade war and Brexit worries, and strong economic growth in the first three quarters of 2019 have been catalysts.

Excluding a few setbacks, the three major stock indexes, the Dow, the S&P 500 and the Nasdaq Composite, witnessed strong momentum throughout the year. These indices have gained 23%, 27.2% and 27.5%, respectively, this year (through Dec 26, 2019). Additionally, the S&P 600 Small-cap Index (SP600) has gained 19.2% year to date.

2019 Growth Catalysts

After a two-year tussle, in December, the two largest economies agreed to sign the phase-one trade deal in January 2020 to end the tariff war, which hurt the global economy. U.S.-China trade tensions wreaked havoc on small-cap earnings this year by increasing costs. Thus, the easing of trade tensions bodes well for small-cap stocks.

The latest economic data points to 2.1% annual growth in the U.S. GDP rate in third quarter of 2019, better than analysts’ expectations. This marks 11 years of continuous economic growth — the longest growth span ever. This has been well-supported by soaring job growth and low unemployment rate for 21 consecutive months. Further, a rebound in factory production, robust domestic homebuilding market, and increase in consumer spending provided enough fodder for overall economic growth.

A dovish monetary stance taken by the Fed has also inspired optimism for economic growth. After three rate cuts in 2019 — July, September and October — the Fed indicated that it will not hike rates in 2020. Lower rates should prove beneficial for small-sized companies, perking up economic activities and resulting in higher spending, thereby boosting domestically focused companies.

Why Small-Cap Stocks?

Small-cap stocks are often considered riskier than large-cap companies but they have more growth potential and offer better returns, especially over the long term. Also, the small-cap stocks have the advantage of quickly changing direction and capitalizing on opportunities, given its small size.

Notably, sentiments of small-cap stocks are closely tied to the domestic economy as these generate most revenues from the domestic market. Small companies can begin to rebound in growing economies faster than larger companies. The upbeat sentiments, currently prevailing around the U.S. markets, provide the right environment for growth of small-cap companies, which are more trending in nature.

Some Underperforming Small Caps to Bounce Back in 2020

Despite the bullishness in markets this year, several small-cap stocks have underperformed the S&P 500. There are chances that some of these stocks might rebound in 2020, given favorable factors and their fundamental strength.

However, it is not easy to pick the potential winners from these undervalued stocks. With the help of the Zacks Stock Screener, we can make the tedious task easier. Here, we have narrowed down on stocks that have underperformed the S&P 500 so far this year, with a market capitalization of less than $1 billion and a Zacks Rank #1 (Strong Buy) or 2 (Buy).

To further shorten the list, stocks with VGM Score of A or B and upward earnings estimate revisions for the next year are taken into consideration.

Five Stocks Meeting the Criteria

The chart below shows year-to-date price performance of our five picks.

Adecoagro S.A. AGRO is an agro-industrial company, with a market cap of $997 million. It engages in farming crops and other agricultural products, dairy operations, sugar, ethanol and energy production, and land transformation activities in South America. So far this year, shares of the company have rallied 22%. The Zacks Consensus Estimate for its 2020 earnings has been revised 8.2% upward over the past 30 days. The Luxembourg City-based company has a VGM Score of A and a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Genesco Inc. GCO is a retailer and wholesaler of footwear, apparel, and accessories, with a market cap of $724 million. The Nashville, TN-based company’s shares have gained 11.2% year to date. Currently sporting a Zacks Rank #1, the stock has a VGM Score of A. Meanwhile, the Zacks Consensus Estimate for the company’s fiscal 2020 EPS has moved up 7.4% over the past 30 days.

American Outdoor Brands Corp. AOBC is a producer and seller of firearms worldwide, and has a market cap of $508 million. So far this year, shares of the company have declined 28.3%. The Springfield, MA-based company currently has a Zacks Rank of 2 and a VGM Score of A. The Zacks Consensus Estimate for the company’s earnings for the next year has been revised 11.5% upward over the past 30 days.

J. Alexander's Holdings, Inc. JAX operates complementary upscale dining restaurants in the United States. It offers an American menu and has a market cap of $146 million. So far this year, shares of the company have rallied 18.6%. The Nashville, TN-based company currently has a Zacks Rank of 2 and VGM Score of A. The Zacks Consensus Estimate for J. Alexander's 2020 earnings has been revised 2.9% upward over the past 30 days.

Tilly's, Inc. TLYS is a retailer of casual apparel, footwear, and accessories for young men and women, and boys and girls in the United States. It has a market cap of $364 million. The company’s shares have gained 12.8% year to date. The Irvine, CA-based company currently sports a Zacks Rank #1. It has a VGM Score of A. The Zacks Consensus Estimate for Tilly's fiscal 2020 EPS has moved up 4.5% over the past 30 days.

Zacks Top 10 Stocks for 2020

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?

These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.

Start Your Access to the New Zacks Top 10 Stocks >>


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American Outdoor Brands Corporation (AOBC) : Free Stock Analysis Report
 
Adecoagro S.A. (AGRO) : Free Stock Analysis Report
 
Genesco Inc. (GCO) : Free Stock Analysis Report
 
Tilly's, Inc. (TLYS) : Free Stock Analysis Report
 
J. Alexander's Holdings, Inc. (JAX) : Free Stock Analysis Report
 
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