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Small-Cap Stocks Turn Out Best Performers of 1H: 5 Top Picks

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Wall Street completed an impressive first half of 2021 with abroad-based rally 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 first half.

The three major stock indexes — the Dow, the S&P and the Nasdaq Composite —rallied 12.7%, 14.4% and 12.5%, respectively, in first-half 2021. The mid-cap specific S&P 400 climbed 16.9% in the same period. Meanwhile, the two small-cap centric indexes — the Russell 2000 and the S&P 600 — jumped 17% and 22.9%, respectively.

Reopening of the Economy

Nationwide deployment of COVID-19 vaccinations and a sharp decline in new coronavirus cases have helped in a faster-than-expected reopening of the U.S. economy. This has significantly ramped up small business activities. Notably, the National Federation of Independent Business reported that its Small Business Optimism Index remained firm at 99.6 in May (latest available data).

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. Consequently, the reopening of the U.S. economy immensely benefited 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 2020. 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 five years at a 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.

Last week, the Fed announced its final extension of the Paycheck Protection Program Liquidity Facility. This is a key stimulus to cash-strapped small businesses hit by the pandemic.

The program, which distributes low-cost loans through paycheck protection to small businesses, was set to expire last week. The Fed has extended it till end of July. The extension will help small businesses receive aid for an extended time period.

Our Top Picks

We have narrowed down our search to five small-cap (market capital < $1 billion) stocks that have skyrocketed more than 100% year to date and still have strong upside left for 2021.

These stocks have witnessed robust earnings estimate revisions in the last 30 to 60 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.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

TimkenSteel Corp. TMST manufactures and sells alloy steel, and carbon and micro-alloy steel products in the United States and internationally. It operates in the SBQ Steel Bar, Seamless Mechanical Steel Tubes, and Billets; and Value-added Precision Products and Services segments.

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 46.9% over the last 60 days. The stock price has soared 197% year to date.

Olympic Steel Inc. ZEUS processes and distributes metal products in the United States and internationally. It operates in three segments: Carbon Flat Products, Specialty Metals Flat Products;, and Tubular and Pipe Products.

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 51.6% over the last 60 days. The stock price has jumped 122.9% 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 60.7% over the last 30 days. The stock price has climbed 120.4% year to date.

Genesco Inc. GCO operates as a retailer and wholesaler of footwear, apparel and accessories. It operates through four segments: Journeys Group, Schuh Group, Johnston & Murphy Group, and Licensed Brands.

The company has expected earnings growth of more than 100% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved 17% north over the last 60 days. The stock has rallied 108.5% year to date.

Century Casinos Inc. CNTY operates as a casino entertainment company worldwide. It develops and operates gaming establishments, as well as related lodging, restaurant, horse racing, and entertainment facilities.

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 33.3% over the last 30 days. The stock price has appreciated 104.2% year to date.

Time to Invest in Legal Marijuana

If you’re looking for big gains, there couldn’t be a better time to get in on a young industry primed to skyrocket from $17.7 billion back in 2019 to an expected $73.6 billion by 2027.

After a clean sweep of 6 election referendums in 5 states, pot is now legal in 36 states plus D.C. Federal legalization is expected soon and that could be a still greater bonanza for investors. Even before the latest wave of legalization, Zacks Investment Research has recommended pot stocks that have shot up as high as +285.9%

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Conns, Inc. (CONN) : Free Stock Analysis Report

Genesco Inc. (GCO) : Free Stock Analysis Report

Century Casinos, Inc. (CNTY) : Free Stock Analysis Report

Olympic Steel, Inc. (ZEUS) : Free Stock Analysis Report

Timken Steel Corporation (TMST) : Free Stock Analysis Report

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