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Small Caps Post Best Recovery From September Mayhem: 7 Picks

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Nalak Das
·6 min read
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Wall Street is recovering from last month's turmoil on the increasing possibility of at least a partial stimulus package being cleared by the U.S. Congress. The three major large-cap centric stock indexes are crawling back to the growth trajectory. The technology sector, which suffered the most in September, is again on a northbound journey. the reopening stocks have started getting investors' attention on renewed fiscal stimulus hope.

Meanwhile, the most-important development in Wall Street that is that the small-cap stocks have outperformed their large-cap peers in the market's turnaround from the September turmoil. Several small-cap stocks have jumped double digits in less than two weeks.

Small Caps Shine in Market's Recovery

Wall Street's astonishing V-shaped recovery from the coronavirus-induced short bear market, which started on Mar 24, came to an end on Sep 2. During this period of more than five months, the market witnessed an impressive rally, barring some minor fluctuations.

Last month's turmoil, resulting from concerns of market overvaluation, uncertainty regarding a fresh stimulus and the spike in new coronavirus cases globally, reached its trough on Sep 23. Thereafter, all the major stock indexes took an upturn.

Noticeably, stock market data since Sep 23 to Oct 8 has clearly revealed that two small-cap specific indexes, the Russell 2000 and the S&P 600 jumped, 12.2% and 12.1%, respectively. During this period, the three large-cap centric stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — rallied 6.2%, 6.5% and 7.4%, respectively.

Moreover, if we consider the performance of Wall Street since Mar 23, the Russell 2000 and the S&P 500 have climbed 68.5% and 59.7%, respectively. The Dow and the S&P 500 have surged 56.1% and 57.3%, respectively. The tech-laden Nasdaq Composite is the only index which has outperformed the small-cap centric indexes with a return of 72.2%.

A major driver of the overwhelming performance of small-cap stocks from Mar 23 to Sep 2 is the unprecedented stimulus injected by the U.S. government. Likewise, the strong showing of small caps since Sep 23 is based on the expectation that the likely truncated fiscal stimulus will include small businesses.

Small Businesses Are Vital

Small corporates create a significant number of jobs in the U.S. economy. More than 50% of the newly created jobs in the private sector originate here. These people constitute a large part of customers for big businesses.

Moreover, small companies are a major part of the supply chain management systems of large companies for innovative and technologically superior inputs. Additionally, small businesses more often than not form a vital cog in corporate America's customer base.

The U.S. economy will gradually return to the pre-pandemic level as more parts of it reopen. Consequently, further reopening of the economy is likely to result in greater momentum for small businesses.

Our Top Picks

We have narrowed down our search to seven small-cap stocks that have popped more than 20% since Sep 23. These stocks have strong growth potential and witnessed robust earnings estimate revisions. Each of our picks sports 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 seven picks since Sep 23.

 

Hibbett Sports Inc. HIBB is engaged in the retail of athletic-inspired fashion products through its stores. Its stores offer a range of merchandise, including athletic footwear, athletic and fashion apparel, sports equipment, and related accessories. It operates in two segments, Lawson and Bolt.

The company has expected earnings growth of 86.3% for the current year (ending January 2021). The Zacks Consensus Estimate for the current year has improved more than 48.1% over the last 60 days. The stock price has soared 32.9% since Sep 23.

Nautilus Inc. NLS is a fitness solutions company, which designs, develops, sources, and markets cardio and strength fitness products, and related accessories for consumer and commercial use in the United States, Canada and internationally. It operates in two segments, Direct and Retail.

The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved more than 100% over the last 60 days. The stock price has jumped 30% since Sep 23.

Meridian Corp. MRBK operates as the bank holding for Meridian Bank that provides commercial banking products and services for small and middle-market businesses primarily in southeast Pennsylvania, Delaware, and southern New Jersey.

The company has expected earnings growth of 60.1% for the current year. The Zacks Consensus Estimate for the current year has improved 6.5% over the last 60 days. The stock has climbed 27.2% since Sep 23.

Surface Oncology Inc. SURF is a clinical-stage immuno-oncology company. It develops therapies for the treatment of cancer. The company has expected earnings growth of 63.5% for the current year. The Zacks Consensus Estimate for the current year has improved  25.8% over the last 60 days. The stock has climbed 25% since Sep 23.

Northrim BanCorp Inc. NRIM provides commercial banking products and services to businesses and professional individuals in Alaska. It operates in two segments, Community Banking and Home Mortgage Lending.

The company has expected earnings growth of 28.6% for the current year. The Zacks Consensus Estimate for the current year has improved 42.2% over the last 60 days. The stock has appreciated 24.4% since Sep 23.

Lumber Liquidators Holdings Inc. LL provides solid and engineered hardwood flooring, laminate flooring, bamboo flooring, cork flooring, vinyl flooring, wood-look tile flooring, butcher blocks, mouldings, accessories and tools.

The company has expected earnings growth of 86.2% for the current year. The Zacks Consensus Estimate for the current year has improved 11.3% over the last 60 days. The stock has advanced 24.4% since Sep 23.

Lakeland Industries Inc. LAKE manufactures and sells industrial protective clothing and accessories for the industrial and public protective clothing market worldwide. It has five divisions and three wholly owned subsidiaries.

The company has expected earnings growth of more than 100% for the current year (ending January 2021). The Zacks Consensus Estimate for the current year has improved 45.5% over the last 60 days. The stock has surged 20.6% since Sep 23.

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 +24.3% per year.

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

See these time-sensitive tickers now >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Hibbett Sports, Inc. (HIBB) : Free Stock Analysis Report
 
Lumber Liquidators Holdings, Inc (LL) : Free Stock Analysis Report
 
Northrim BanCorp Inc (NRIM) : Free Stock Analysis Report
 
Lakeland Industries, Inc. (LAKE) : Free Stock Analysis Report
 
Nautilus Group, Inc. The (NLS) : Free Stock Analysis Report
 
Meridian Bank (MRBK) : Free Stock Analysis Report
 
Surface Oncology, Inc. (SURF) : Free Stock Analysis Report
 
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