Small Business Optimism Hits 4-Month High In April: 5 Picks

Small business organizations may become hidden gems for investors in 2019. Wall Street rallied in the first four months of this year. Aside from large-cap stocks, small caps also witnessed significant growth. Market turmoil started in May owing to renewed trade tensions between the United States and China.

At this juncture, small-cap stocks are likely to emerge as diamonds in the rough, pushing aside large caps. Strong fundamentals of the U.S. economy and immunity to external disturbances have increased these stocks' popularity.

Small Business Optimism Jumps

On May 14, the National Federation of Independent Business (NFIB) reported that the NFIB Small Business Optimism Index rose 1.7 points to 103.5 in April, marking its 4-month high. The NFIB cited strong fundamentals of the U.S. economy and solid GDP growth in the first quarter of 2019 as the primary reasons for the optimistic views.

A net 9% of all seasonally adjusted owners reported higher nominal sales in the past three months, reflecting an improvement of four points. Moreover, 20% owners are expecting higher real sales volumes, marking a gain of one point. The frequency of reports of positive profit trends improved five points sequentially.

Why Small Business Is Important?

Small corporates create significant amount of jobs in the U.S. economy. More than 50% of the newly created jobs in the private sector originate from this sector. 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 often end up being an important part of corporate America's customer base.

Meanwhile, the Russell 2000 (RUT) -- the benchmark index of small-cap stocks -- has jumped up 12.3% year to date.

Small Caps Are Important During Volatility

Small-cap stocks carry some special features which make them very useful under a volatile market. Small-cap stocks are mostly immune to any external shock since the United States is the primary market of their products. This is aiding this segment to outperform the broader market defying extreme volatility.

Owing to their domestic business strategy, small-cap stocks are immune to the movement of the U.S. dollar. A strong U.S. dollar will make exports of large companies uncompetitive. However, small-cap stocks remain unaffected by foreign exchange volatility.

Small-cap companies generally benefit first from an improving domestic economy. A strong economic condition tends to coincide with rising interest rate. However, in order to fund expansion, small-cap companies are less likely to take the debt route compared with their large peers making them less sensitive to the interest rate movement.

Additionally, reduction of corporate tax from 35% to 21% is a major catalyst for small-cap companies. These companies book almost all of their revenues in the homeland. As a result, a significant reduction in the corporate tax rate is immediately accretive to their cash flow.

Our Top Picks

At this stage, it will be prudent to invest in small-cap stocks with a favorable Zacks Rank and strong growth potential. We have narrowed down our search to five stocks with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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

Limbach Holdings Inc. (NASDAQ:LMB) provides commercial specialty contract services in the United States. It operates in two segments, Construction and Service. The company has an expected earnings growth rate of 251.9% for the current year. The Zacks Consensus Estimate for the current year has improved 31.7% over the last 30 days.

Health Insurance Innovations Inc. (NASDAQ:HIIQ) operates as a cloud-based technology platform and distributor of individual and family health insurance plans, and supplemental products in the United States. The company has an expected earnings growth rate of 28.5% for the current year. The Zacks Consensus Estimate for the current year has improved 4.6% over the last 30 days.

Fibrocell Science Inc. (NASDAQ:FCSC) is an autologous cell and gene therapy company that focuses on discovering and developing therapies for diseases affecting the skin and connective tissues in the United States. The company has an expected earnings growth rate of 20.7% for the current year. The Zacks Consensus Estimate for the current year has improved 16.7% over the last 30 days.

Camden National Corp. (NASDAQ:CAC) provides commercial and consumer banking products and services to consumer, institutional, municipal, non-profit, and commercial customers in the United States. The company has an expected earnings growth rate of 10.6% for the current year. The Zacks Consensus Estimate for the current year has improved 5.6% over the last 30 days.

First Business Financial Services Inc. (NASDAQ:FBIZ) provides commercial banking products and services for small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals in the United States. The company has an expected earnings growth rate of 22% for the current year. The Zacks Consensus Estimate for the current year has improved 10.7% over the last 30 days.

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