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Small Business Sentiment Second Best in 45 Years: 5 Picks

Gourav Kanti Bagchi
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On Mar 13, the National Federation of Independent Business (NFIB) released data for its small-cap business optimism index, which rose to its second-highest level in February since its inception 45 years ago. Trump administration’s tax overhaul policies and strengthening domestic economy supported these gains.

Small-cap stocks are believed to have a higher level of volatility compared to their large and mid-cap counterparts but provide comparatively better returns. Moreover, recent trade war uncertainty makes these largely domestically focused stocks a strong investment option. Also, small-cap stocks will show greater growth potential following strong business optimism and a weak tax environment, which makes them great picks at this point.

Small Business Sentiment Index Hovers Near Record High

The NFIB small-business optimism index increased 0.7 points to 107.6 in February. Out of the 10 major components in the index, seven registered an increase.

Meanwhile, the three key components of the index, expectation of higher sales prospects, improving economy and strong inventory rose 3%, 2% and 2%, respectively. Inventory investment was best since 2000, while earnings trends were strongest since 1987. Also, capital outlays were the biggest since 2004.

NFIB President Juanita Duggan said “the historically high readings” highlighted that Trump’s new steel and aluminum tariffs and lower taxes will play a “transformative” role for small businesses. Additionally, NFIB Chief Economist Bill Dunkelberg said small-business are thriving in ways which have not been witnessed in more than “a decade.”

Trump’s Economic Policies in Focus

After weeks of market jitters, Trump finally signed the tariff plan into law on Mar 8, slapping tariffs of 25% on steel imports and 10% on aluminum imports from other countries. It will come into effect within 15 days. However, Canada and Mexico were exempted from these new U.S. tariffs. (Read More)

Moreover, Trump’s protectionist stance raised concerns over a possible retaliation by other countries with similar kind of moves. Investors have been concerned about prospects of a trade war. Fears of this nature could actually benefit small-cap companies, which have limited exposure to the global market compared to their mid- and large-cap counterparts.

Additionally, last year, the much awaited Tax Bill was finally signed by President Trump in the Oval office. The Tax Bill, now known as the Tax Cuts and Jobs Act of 2017, permanently slashes corporate tax rates from 35% to 21%. Additionally, on Mar 13, the President while talking to U.S. Representative for Texas, Kevin Brady raised expectations for “additional tax cuts” as he said that he wishes for a “phase two” in tax cuts.

Before the tax cut, companies on the small-cap index Russell 2000 had to pay a median effective tax rate of 31.9% while the larger, multi-national companies on the S&P 500 pay a median effective tax rate of 28%, according to Thomson Reuters data. This is why Trump’s Tax Cuts and Jobs Act of 2017 is expected to benefit small-cap stocks to a great extent.

Our Choices

Strong business sentiment, Trump’s pro-growth economic policies, stronger domestic economy and upbeat jobs report bode well for small-cap stocks. Moreover, possibility of a trade war between major countries following Trump’s new tariff laws makes small-cap stocks a wise investment choice.

Given this backdrop, it makes sense to bet on small-cap stocks, which are included in the Russell 2000 Index. Notably, this prominent small cap index has gained 2.7% in the year-to-date period.

These five stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). 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 based on a good Zacks Rank and VGM Score.

Almost Family, Inc. AFAM is a home healthcare services provider in the United States.

Almost Family has a Zacks Rank #2 and a VGM Score of A. The expected earnings growth rate for the current year is 45.7%. The Zacks Consensus Estimate for the current year has improved 16.8% over the last 30 days. Almost Family has gained 4% year to date.

Veritiv Corporation VRTV is a business-to-business distributor of packaging, facility solutions, print, and publishing products and services in the United States.

Veritiv has a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 21.8% over the last 30 days. Veritiv has gained 29.3% year to date. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stoneridge, Inc. SRI is a designer and manufacturer of engineered electrical and electronic components, modules and systems.

Stoneridge has a Zacks Rank #1 and a VGM Score of A. Earnings are expected to grow 15.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 9.6% over the last 30 days. Stoneridge has gained 10.3% year to date.

BJ's Restaurants, Inc. BJRI is an owner and operator of casual dining restaurants in the United States.

BJ's Restaurants has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth rate of 27.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.5% over the last 30 days. BJ's Restaurants has gained 18.9% year to date.

Escalade, Incorporated ESCA is a manufacturer and seller of sporting goods in North America, Europe, and internationally.

Escalade has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth rate of 21.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 9.3% over the last 30 days. Escalade has gained 4.3% year to date.

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