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Small Firms Break 35-Year Record Set in Reagan Era: 5 Picks

Tirthankar Chakraborty
Small businesses continue to benefit from tax cuts and regulatory roll backs by the White House.

A measure of small-business owners’ sentiment rose to an all-time high last month and exceeded the prior peak scaled in September 1983. Capital spending plans hit the highest level since 2007, while plans to expand inventories are the strongest since 2005. Plans to create more jobs also set a record.

Small businesses continue to gain from tax cuts and regulatory roll backs by the White House. Consistent economic expansion also lent more confidence to small businesses. Needless to say, small businesses are immune to a full-on trade war that could have implications on global economic growth. Thus, investing in small-cap stocks seems like a rational move at the moment.

Small Business Optimism Hits Highest Level in 45 Years

The National Federation of Independent Businesses’ (NFIB) small business optimism index rose 0.9 points to 108.8 on a seasonally adjusted basis in August, surpassing the previous record of 108 some 35 year ago during the Reagan era. In fact, the index has hit the highest level since the lobbying group began tracking in 1974.

As per the NFIB, many of its subcategories tracked in the index also touched record levels. NFIB said in a release that “capital spending plans were the highest since 2007.” What’s more, the percentage of small firm owners saying that it is a good time to expand their business tied the May 2018 all-time high.

Inventory investment plans are also the strongest since 2005. Small firms have been boosting inventories to match the rise in consumer demand for goods and services. Needless to say, consumers are pretty confident about their well-being and are not refraining from splurging.

According to the Conference Board, the consumer confidence index climbed to 133.4 in August from a revised 127.9 in July, the highest since October 2000 and above the post-recession high of 130 scaled this February. In fact, the only other period when consumer sentiment was higher was in the Internet-fueled boom of 1997 to 2000 (read more: US Consumers Most Confident Since 1990s Internet Boom: 5 Picks).

At the same time, small businesses are not only planning to hire more workers but also raise wages and compensations for current employees. The economy has already been able to produce an average of 207,000 new jobs per month so far this year, faster than the hiring spree of both 2016 and 2017. While the jobless rate remained at an 18-year low of 3.9%, the yearly pay rate climbed to 2.9% from 2.7% in August, the highest since the end of the Great Recession (read more: Dollar Strengthens on Blockbuster Jobs Data: 5 Top Gainers).

What’s Boosting Small Business Sentiment?

Juanita Duggan, the president and CEO of the NFIB said that “there is no question that the change of policy in Washington has everything to do with the increase in the optimism index.” She attributed much of the increase to President Trump’s tax reform that benefits American small business owners. She added that the Tax Cuts and Jobs Act will provide substantial tax relief for millions of small business owners. This extra cash will help U.S.-based businesses to invest more to increase productivity and workers’ wages.

Small businesses are, by the way, increasingly optimistic as the economic expansion enters its tenth year. U.S. economic growth was stronger than expected last spring. Gross domestic product (GDP) increased at an annualized rate of 4.2% in the April-June quarter. This was slightly higher than the initial 4.1% read and also the strongest since a 4.3% annual gain in the third quarter of 2014, per the Bureau of Economic Analysis. On the whole, the economy expanded 3.2% in the first half of this year and is on track to hit the Trump administration’s annual growth target of 3%. If that happens, it would be the best yearly performance since 2005 (read more: 5 Top Stocks to Ride on Best Economic Growth in 4 Years).

 

Time to Think Small: 5 Solid Buys

Banking on the aforesaid positives, investing in small-cap stocks seems judicious. Lest we forget, unresolved trade issues continue to bog the market after Trump recently said that he was “ready to go” on hitting China with an additional $267 billion worth of tariffs. The Trump administration is already finalizing plans to impose tariffs on $200 billion worth of Chinese products. If these measures are met with retaliatory actions by China, it could lead to a full-on trade conflict, one that could affect global economies and eventually squeeze corporate profits. But, small businesses have high domestic exposure in terms of revenue generation, which for the time being is shielding them from international disputes.

Notably, the prominent index for small-caps, the Russell 2000 index, has jumped 8% so far this year, higher than the broader S&P 500’s rise of 6.4%.

We have, thus, selected five small-caps that should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

BG Staffing, Inc. BGSF provides temporary staffing services in the United States. The company has a Zacks Rank #2 and a VGM Score of B. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 19.9% in the same period. The company’s projected growth rate for the current quarter is 17.1%, while the Staffing Firms industry is expected to decline 23%.

Harvard Bioscience, Inc. HBIO, headquartered in Holliston, MA, develops, manufactures, and markets scientific instruments, systems, and lab consumables used in life science basic research, drug discovery, and clinical and environmental testing. The company has a Zacks Rank #2 and a VGM Score of B. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 5% in the same period. The company’s projected growth rate for the current quarter is 33.3%, while the Instruments - Scientific industry is expected to rally 14.5%.

Vertex Energy, Inc. VTNR provides a range of services designed to aggregate, process, and recycle industrial and commercial waste systems in 15 states, primarily in the Gulf Coast, Midwest, and Mid-Atlantic regions of the United States. The company has a Zacks Rank #2 and a VGM Score of A. In the last 60 days, one earnings estimate moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings rose 18% in the same period. The company’s projected growth rate for the current quarter is 66.7%, while the Pollution Control industry is likely to rally 22.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hallmark Financial Services, Inc. HALL underwrites, markets, distributes, and services property/casualty insurance products to businesses and individuals in the United States. The company has a Zacks Rank #2 and a VGM Score of A. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 10.7% in the same period. The company’s projected growth rate for the current quarter is 322.2%, while the Insurance - Property and Casualty industry is expected to rise 75.1%.

Summer Infant, Inc. SUMR designs, markets, and distributes branded juvenile health, safety, and wellness products primarily in North America. The company has a Zacks Rank #1 and a VGM Score of A. In the last 60 days, one earnings estimate moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings rose 50% in the same period. The company’s projected growth rate for the current quarter is 150%, while the Consumer Products - Discretionary industry is likely to grow 2.6%.

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