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Last week, U.S. equities suffered their gravest losses in more than two years. Fears of an impending trade war between the United States and China crippled markets, with the Dow suffering its worst week weekly loss since January 2016. These losses underscore the challenges faced by large-cap stocks in recent times, a trend that is likely to continue.
In fact, small-cap stocks have posted better performances compared to their larger counterparts over most of this month. Investors have sought out smaller companies for two reasons. First, they are likely to remain relatively insulated from the impact of a trade war. Second, they are expected to benefit appreciably from recent tax cuts. This is why it makes sense to invest in select small cap stocks at this point.
Small Caps Outperform Larger Counterparts
Since the end of February, the Dow and the S&P 500 have lost around 6% and 4.6%, respectively. In contrast, the small cap heavy Russell 2000 index has edged 0.2% down. This indicates that investors are keen to snap up small caps for their tax cuts and trade war related advantages.
Such a tendency has also gained favor among the investing community because large manufacturers are bound to experience a profits squeeze as Trump's steel and aluminum tariffs raise input costs. Further, retaliation from China and the European Commission could weigh on the bottom lines of large companies with multinational operations.
In such an event, small-cap stocks look to be relatively better investments. This is because most of them are domestically focused with negligible foreign exposure. This enables them to gain from recent tax reductions while protecting them from the fallout of a potential trade war.
Replay of Post-Election Surge and Fall Likely?
One section of investors feels that the current scenario is nearly identical to the situation prevailing immediately after Trump's victory in November 2016. At that time, small-cap shares had experienced a tremendous upsurge, buoyed by speculation surrounding tax cuts and protectionist measures.
As a result, between Election Day and the end of 2016, the Russell 2000 gained 14%, easily outperforming the S&P 500's 4.6% increase. Subsequently, however, gains for small caps faded as doubts arose over the Trump administration's ability to implement the President's electoral promises.
As of now, the overall economic outlook continues to be bright. But the situation could change drastically if a trade war really does happen. With both the Dow and the S&P 500 posting their worst weekly losses in more than two years, investors likely feel that such a nightmare may indeed come true. Given this backdrop, it is unlikely that the popularity of small caps will decline in the near term.
Blue chip stocks have recently received a hammering at the bourses. This is primarily due to concerns that a trade war could soon break out between the United States and China. Small caps have emerged as relatively safe bets in this scenario. Not only do they stand to gain the most from tax cuts, they are also relatively insulated from the fallout of a trade war.
Adding small-cap stocks to your portfolios looks like a particularly smart option at this point. 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 VGM Score of A.
CRA International, Inc. (NASDAQ: CRAI ) provides legal, regulatory, business consulting and other expert services through its specialized consultants across the globe. CRA International is headquartered in Boston, MA.
CRA International's expected earnings growth for the current year is 12.6%. The Zacks Consensus Estimate for the current year has improved by 19.4% over the last 60 days.
Unisys Corporation (NYSE: 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 is based in Blue Bell, PA.
Unisys' expected earnings growth for the current year is more than 100%.
Global Brass and Copper Holdings Inc (NYSE: BRSS ) is a converter, fabricator, distributor and processor of copper and brass products primarily in North America. Global Brass and Copper Holdings is headquartered in Schaumburg, IL.
Global Brass and Copper Holdings' expected earnings growth for the current year is 21.2%. The Zacks Consensus Estimate for the current year has improved by 21% over the last 30 days.
Stoneridge, Inc. (NYSE: SRI ) is an independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium and heavy-duty truck, and agricultural vehicle markets. Stoneridge is based in Novi, MI.
Stoneridge's expected earnings growth for the current year is 24.5%. The Zacks Consensus Estimate for the current year has improved by 18% over the last 30 days.
Veritiv Corp (NYSE: VRTV ) engages in offering North American business-to-business distribution solutions. It provides packaging, print and print management, publishing, supply chain, facility and logistics solutions that span the entire lifecycle of core business operations. Veritiv is headquartered in Atlanta, GA.
Veritiv's expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 46% over the last 30 days.
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