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Small-cap stocks, which were the laggards in the first half of the year, staged a nice comeback in the second half on tax reform optimism and accelerating economy.
After struggling its way out from the House and the Senate, the tax bill finally got through Congress and the White House with President Donald Trump’s signature. The corporate tax cut from 35% to 21% is a big boon to small-cap stocks. Companies on the small-cap index Russell 2000 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 the Thomson Reuters data. The median tax rate for the 30 mega-cap stocks on the Dow Jones Industrial Average is even low at 23.8%.
Growth in the U.S. economy is on a solid path buoyed by an impressive labor market, higher wages, increasing consumer spending and high consumer confidence. Notably, the economy expanded at the fastest clip in three years in best back-to-back quarters with at least 3% GDP growth and unemployment at the lowest level of 4.1% since December 2000. Americans are highly optimistic about the economy, with consumer confidence climbing to the highest level in 17 years.
Against such a backdrop, small-cap stocks are the biggest beneficiaries as these are closely tied to the U.S. economy and do not have much exposure to the international market. These pint-sized stocks generate most of their revenues from the domestic market and generally outperform on improving American economic health. Further, these are free from the clutches of any political malaise like the political gridlock in Washington.
Fed Rate Hike
After hiking rates in December 2015 and December 2016, the Fed has raised interest rates three times this year and looks to lift off three times as well in 2018. This indicates a stronger economy and propels small-cap stocks higher.
How to Play?
While there are several stocks to play the bullish trend, we have presented five small caps that tend to gain more than their counterparts in such a trending market. All these stocks have a top Zacks Rank #1 (Strong Buy) or 2 (Buy), Growth Score of B or better, solid Industry Rank in the top 45%, positive earnings estimate revision for fiscal 2018 over the past 30 days and double-digit earnings growth for fiscal 2018. All these suggest their continued outperformance in the coming months too.
Based in West Fargo, ND, Titan Machinery owns and operates a diversified mix of agricultural, construction, and consumer products stores in the United States and Europe. The company has seen positive earnings estimate revision of three cents for the next fiscal year over the past month, and has an expected earnings growth rate of 188.12%. The stock carries a Zacks Rank #2 and has a Growth Score of B and has a Zacks Industry Rank in the top 27%. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)
Based in Denver, CO, Bill Barrett is an independent energy company engaged in acquiring, exploring, and developing oil and natural gas resources in the United States. The Zacks Consensus Estimate for 2018 has been moved up from a loss of 42 cents to earnings of four cents over the past month and the expected growth rate is 109.58%. The stock belongs to an Industry Rank in the top 31%and has a Zacks Rank #2 and a Growth Score of B.
Based in Marietta, PA, Donegal Group is a regional property-casualty insurance holding company doing business in Mid-Atlantic and Southern states through its insurance subsidiaries: Atlantic States Insurance Company. The stock has seen solid earnings estimate revision of 19 cents per share over the past month for 2018, reflecting year-over-year earnings growth of 121.54%. It has a Zacks Rank #2 and a Growth Score of B. The stock falls in the Industry Rank in the top 29%.
Based in Cambridge, MA, Catabasis is a biopharmaceutical company that focuses on the discovery, development and commercialization of therapeutics for treatment of inflammatory, immunological and metabolic diseases. The Zacks Consensus Estimate for 2018 has moved up from a loss of $1.21 to earnings of $1.04 over the past month, representing year-over-year growth of 21.38%. The stock carries a Zacks Rank #2, has a Growth Score of B and belongs to an Industry Rank in the top 45%.
Based in Portland, OR, Craft Brew is engaged in the business of brewing, marketing and selling of craft beers in the United States. It saw positive earnings estimate revision of three cents for 2018 over the past month and has an expected earnings growth rate of 37.50%. Craft Brew falls in the Industry Rank in the top 45%, and carries a Zacks Rank #2 and a Growth Score of A.