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Turkey Crisis Spooks Wall Street: 5 Top Small-Cap Picks

Swarup Gupta
Betting on small caps makes sense at this point as these are likely to lose the least in this scenario.

On Jul 10, Turkey’s currency crisis triggered widespread losses for the U.S. equity markets. The seeds of crisis were sown after the ECB grew concerned about the exposure of the currency union’s largest lenders to Turkey.

Consequently, the lira plunged 15% on Friday and the dollar hit a one-year high. Following the lira’s plunge, President Trump doubled existing tariffs on Turkish metal imports. Meanwhile, U.S. sanctions have raised Russia’s market volatility.

Betting on small caps makes sense at this point as these are likely to lose the least in this scenario. Their domestic focus and the fact that they will be the largest beneficiaries of tax cuts also make them strong investment options.

Plunge in Lira Leads to Broader Market Losses

U.S. markets suffered heavy losses on Friday as the lira’s plunge versus the dollar unnerved investors. Turkey’s currency plunged 15% even as the ICE U.S. Dollar Index surged to its highest level since July 2017. The lira’s descent comes in the wake of concerns expressed by the ECB over the exposure of the currency bloc’s largest lenders to Turkey.

In June, president Recep Tayyip Erdogan was re-elected in a snap election. His growing power has led the ECB to raise serious questions about Turkey’s central bank. Immediately after his victory, Erdogan named Berat Albayrak, his son-in-law as finance minister, a move that was viewed negatively by market watchers.

Trump Doubles Tariffs on Turkey Metal Imports

Market watchers believe that the Central Bank of the Republic of Turkey’s (CBRT) independence has been harmed as a result of these developments. They think the CBRT has not done enough at the right time to combat the country’s soaring inflation and sinking currency.

Following the lira’s plunge, President Trump announced that he had authorized the doubling of existing tariffs on steel and aluminum imports from Turkey. Trump believes that since the dollar remains strong, weakness in a trade partner’s currency makes its goods more attractive in the global market.

Russian Tensions Add to Investor Worries

Meanwhile, volatility in Russia’s markets is also raising fears of a global contagion. Fresh U.S. sanctions and chances of further measures over the next 90 days are weighing on the ruble and Russia’s blue-chip stocks.

Uncertainty prevails over the Trump administration’s commitment toward enforcing these sanctions. This is why Russia is bracing for further economic pain in the days ahead. The ruble dropped to a two-year low on Thursday on such concerns.

The sanctions have been enforced in response to a nerve-agent attack conducted in March against a former Russian spy in the United Kingdom. Even though Moscow has denied any role in the attack, the United States and the U.K. have held Russia responsible.

Our Choices

Even as all indexes closed in the red on Friday, the small-cap heavy Russell 2000 outperformed its larger-cap peers. This is because small caps could lose the least in the prevailing scenario, marked by geopolitical tensions and a surging dollar. 

Their domestic focus and tax cuts are other factors working in their favor. 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, each of which has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Covenant Transportation Group, Inc. CVTI is a truckload carrier that offers just-in-time and other premium transportation service for customers throughout the United States.

Covenant Transportation’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 6.2% over the last 30 days.

Rent-A-Center, Inc. RCII is the largest rent-to-own operator in the United States offering durable goods such as consumer electronics, appliances, computers, furniture and accessories.

Rent-A-Center’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 0.9% over the last 30 days.

Unisys Corporation UIS is an IT firm, specializing in securing client operations, increasing efficiency of data centers, enhancing support to their end users and constituents and modernizing their enterprise applications.

Unisys’ expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 13.9% over the last 60 days.

NCI Building Systems Inc. NCS is one of the major integrated manufacturers of metal products for the North American non-residential construction industry.

NCI Building Systems’ expected earnings growth for the current year is 77.5%. The Zacks Consensus Estimate for the current year has improved by 3.6% over the last 60 days.

CRA International Inc. CRAI provides legal, regulatory, business consulting and other expert services through its specialized consultants across the globe.

CRA International’s projected growth rate for the current year is 21.5%. The Zacks Consensus Estimate for the current year has improved by 4.5% over the last 30 days.

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Covenant Transportation Group, Inc. (CVTI) : Free Stock Analysis Report
 
Unisys Corporation (UIS) : Free Stock Analysis Report
 
NCI Building Systems, Inc. (NCS) : Free Stock Analysis Report
 
Rent-A-Center, Inc. (RCII) : Free Stock Analysis Report
 
CRA International,Inc. (CRAI) : Free Stock Analysis Report
 
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