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IMF Lowers Global Economic Growth Rate: 5 Small-Cap Picks

Zacks

On Oct 8, the International Monetary Fund (IMF) lowered its global economic forecast for 2018 and 2019 citing lingering trade-related conflicts between United States and its major trading partners, especially China. Imposition of tariffs and retaliatory tariffs between trading partners may significantly disrupt global supply chain system resulting in a halt in economic activities worldwide.

At this juncture, small-cap stocks are likely to emerge as diamonds in the rough pushing aside the large-cap stocks. Strong fundamentals of the U.S. economy, massive tax-cut by the Trump administration and immunity to external disturbances have raised these stocks’ popularity. Consequently, investment in the top-ranked U.S. focused small-cap stocks will be a prudent move.

IMF Lowers Global Growth Projections

On Oct 8, the IMF released its latest edition of global growth projection after its annual meeting in Bali, Indonesia. The agency projected that global growth rate will be 3.7% for both 2018 and 2019, a decline of 0.2% from its earlier projection given in July. Moreover, worldwide total trade volume is estimated to grow by 4.2% in 2018 and 4% in 2019, a stiff decline of 0.6% and 0.5%, respectively, from the agency’s previous projections.

Immune to External Disturbances

A major characteristic of small-cap stocks is that these are mostly immune to any international geopolitical disturbance or global economic fluctuation which is the primary reason of volatility in the U.S. stock markets.

Notably, the lingering trade conflict between the United States and China led to the imposition of tariffs and retaliatory tariffs resulting in systematic volatility. Moreover, geopolitical tensions in the European Union are causing persistent fluctuations in large-cap stocks.

Domestic Economy Focused

One typical characteristic of small-cap stocks is that the United States is the main market for their products. The U.S. economy is currently on a strong footing. Both consumer and business confidence remains healthy.

Furthermore, a rising U.S. dollar has made U.S. exports uncompetitive in the global market. Since small-cap corporates sell most of their products to indigenous customers, they remain unaffected by foreign exchange volatility.

Tax Overhaul: A Major Boost

The two pro-growth agendas of President Trump, namely, significant cut in corporate tax and deregulation are major catalysts to small-cap stocks. The corporate tax rate has been lowered from 35% to 21%. Small-cap corporates book most of their revenues in the homeland. Consequently, a significant reduction in corporate tax rate would be immediately accretive to cash flow of these companies.

Our Top Picks

At this stage, investors with a higher risk appetite and return expectations can make the most by investing in small-cap stocks. However, picking winning stocks can be a difficult task.

This is where our VGM Score comes in handy, which helps us to select winners. We narrowed down our search on five stocks with a market cap of below $1 billion. Each of these stock have a Zacks Rank #1 (Strong Buy) and VGM Score A. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below depicts price performance of our five picks year to date.



Rent-A-Center Inc. RCII leases household durable goods to customers on a rent-to-own basis in the United States. The company has expected earnings growth of 238.9% for current year. The Zacks Consensus Estimate for the current year has improved by 21% over the last 60 days.

CONSOL Coal Resources LP CCR produces and sells high-Btu thermal coal in the Northern Appalachian Basin and the eastern United States. The company has expected earnings growth of 57.5% for current year. The Zacks Consensus Estimate for the current year has improved by 9.5% over the last 60 days.

Comtech Telecommunications Corp. CMTL designs, develops, produces, and markets products, systems, and services for communications solutions. The company has expected earnings growth of 49.3% for current year. The Zacks Consensus Estimate for the current year has improved by 23.1% over the last 60 days.

MCBC Holdings Inc. MCFT innovates, designs, manufactures, and markets sport boats and outboard boats in the United States. The company has expected earnings growth of 17.2% for current year. The Zacks Consensus Estimate for the current year has improved by 8.9% over the last 60 days.

UFP Technologies Inc. UFPT designs and converts foams, plastics, composites and natural fiber materials for the medical, automotive, consumer, electronics, industrial and aerospace and defense markets in the United States. The company has expected earnings growth of 56% for current year. The Zacks Consensus Estimate for the current year has improved by 4.8% over the last 60 days.

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