Wall Street completed an impressive first-quarter 2021 after witnessing an astonishing rally in the pandemic-ridden 2020. Like last year, the first-quarter 2021 rally was broad-based in terms of different segments and sectors. Although, market participants are mainly concerned with large-cap stocks, a closer look into Wall Street reveals that it was the small-cap segment that performed the best in the quarter.
The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — rallied 7.8%, 5.8% and 2.8%, respectively, in first-quarter 2021. The mid-cap specific S&P 400 climbed 13.1% in the same period. Meanwhile, the two small-cap centric indexes — the Russell 2000 and the S&P 600 — jumped 12.4% and 17.9%, respectively.
The possibility of a faster-than-expected reopening of the U.S. economy along with the unprecedented fiscal and monetary stimulus has restored market participants’ confidence in small businesses. At this stage, it will be prudent to invest in small-cap stocks with a favorable Zacks Rank.
Reopening of the Economy
The U.S. government has accelerated COVID-19 vaccinations. The speeding up of the process implies chances of a faster-than-expected reopening of the U.S. economy. This along with the easing of the pandemic will significantly ramp up small business activities. Notably, National Federation of Independent Business reported that its Small Business Optimism Index rose to 95.8 in February from 95 in January.
Small businesses 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.
Given their small-scale of operations, small businesses are generally cash-starved. These organizations operate on a thin profit margin and most new businesses are yet to achieve profitability. Therefore, the reopening of the economy will immensely benefit small businesses.
Stimulus Helps in Revival of Small Businesses
In March 2020, the U.S. government provided more than $800 billion to small businesses as part of the CARES Act, which ended in July. In June 2020, the Fed initiated a lending program of up to $600 billion to small and mid-sized businesses. Under this program, businesses with up to 15,000 employees or revenues of up to $5 billion will get a loan in the range of $250,000 to $300 million for 5 years at floating rate.
On Oct 30, the central bank reduced the minimum loan size to $100,000 from $250,000 and decided to ease restrictions on debt for companies already participating in the Paycheck Protection Program.
Moreover, President Joe Biden’s newly injected $1.9 trillion stimulus includes $15 billion in grants to small businesses, along with $35 billion in low-interest loans. The Small Business Paycheck Protection Program of $284 billion in loans will also continue.
Our Top Picks
We have narrowed down our search to five small-cap stocks that have skyrocketed more than 90% year to date and still have strong upside left for 2021. These stocks have witnessed robust earnings estimate revisions in the last 7 to 30 days. 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 five picks year to date.
Rocky Brands Inc. RCKY designs, manufactures and markets footwear and apparel under the Rocky, Georgia Boot, Durango, Lehigh and Michelin brand names in the United States, Canada and internationally. The company operates through three segments: Wholesale, Retail, and Military.
The company has expected earnings growth of 36% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 19.7% over the last 30 days. The stock price has jumped 108.2% year to date.
USA Truck Inc. USAK operates as a truckload carrier in the United States, Mexico, and Canada. It operates through two segments, Trucking and USAT Logistics.
The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 17.2% over the last 30 days. The stock price has climbed 104.9% year to date.
Veritiv Corp. VRTV operates as a business-to-business provider of value-added packaging products and services, as well as facility solutions, print, and publishing products and services in the United States, Canada, Mexico, and internationally.
The company has expected earnings growth of 29.8% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 80% over the last 30 days. The stock price has soared 119.5% year to date.
Oasis Midstream Partners LP OMP provides crude oil, natural gas, and water-related midstream services in North America.
The company has expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 2.4% over the last 7 days. The stock has rallied 90.3% year to date.
Conn’s Inc. CONN operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through two segments, Retail and Credit.
The company has expected earnings growth of more than 100% for the current year (ending January 2022). The Zacks Consensus Estimate for its current-year earnings has improved 17.7% over the last 7 days. The stock price has advanced 98.9% year to date.
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