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Small Caps Climb on Interest Rate Cut Expectations: 5 Picks
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Small-cap stocks (market capital < $1 billion) received a boost this month following the release of two key inflation data, which showed that the inflation rate is dwindling steadily. This along with soft economic data, especially the resilient labor market data, has raised rate cut hopes. Finally, Fed Chairman Jerome Powell’s recent comments significantly boosted market participants’ expectations of the first rate cut in September.
Wall Street has been witnessing an impressive bull run in the past 18 months. The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — jumped during this period. However, small-cap specific benchmarks — the Russell 2000 and the S&P 600 — remained laggards on a sticky inflation rate and uncertainty on interest rate cut.
Following recent developments, on Jul 16, the Russell 2000 surged 3.5% to close at 2,263.67. In intraday trading, the index touched 2,265.21, hitting its highest level since January 2022. Bespoke Investment Group reported that this is the fifth time since 1979 that the Russell 2000 recorded a positive closing for the fifth consecutive day with more than 1% gain every day. On Jul 16, the S&P 600, another small-cap-centric benchmark, advanced 3.6% to close at 1,418.30. In intraday trading, the index touched a 52-week high of 1,419.54.
Inflation is Dwindling
The Department of Labor reported that the consumer price index (CPI) decreased 0.1% month over month in June, in contrast to the consensus estimate of an increase of 0.1%. The reading for May was flat month over month. This marked the first monthly decrease in headline CPI since May 2020. Year over year, CPI increased 3%, marking the lowest level in more than three years. The metric for May was 3.3%.
The core CPI (excluding volatile food and energy items) increased 0.1% month over month in June, lower than the consensus estimate of an increase of 0.2%. The reading for May was also 0.2%. Year over year, core CPI increased 3.3%, marking the smallest annual increase since April 2021. The metric for May was 3.4%.
The Department of Commerce reported that the core personal consumption expenditure (PCE) price index (excluding volatile food and energy items) rose 0.1% month over month in May compared with 0.3% growth in April. Year over year, core PCE inflation — the Fed’s most favorite inflation gauge — rose 2.6% in May compared with 2.8% in April. May marked the lowest monthly rise of this metric since March 2021.
Powell’s Comments
On Jul 15, speaking at the Economic Club of Washington D.C., Fed Chairman Jerome Powell said that the central bank may not wait for the inflation rate to cool to its target 2% for implementing interest rate cut.
According to Powell, “The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%. The Fed is looking for greater confidence and what increases that confidence in that is more good inflation data, and lately here we have been getting some of that.”
Rate Cut Expectations Rise
Notably, the benchmark interest rate is currently in the range of 5.25-5.5%, marking the highest level in 23 years. The yield on the benchmark 10-Year U.S. Treasury Note fell to 4.166% from 4.793% in mid-April.
The CME FedWatch tool currently shows a 100% probability of a Fed fund rate cut by 25 basis points in September. This probability was around 62% in late June. Moreover, the interest rate derivative tool also shows a 96% probability of two rate cuts by the end of 2024.
Our Top Picks
We have narrowed our search to five small-cap stocks. These stocks have strong growth potential for the rest of 2024 and have seen positive earnings estimate revisions in the last 60 days. Finally, 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.
American Axle & Manufacturing Holdings Inc. (AXL - Free Report) designs, engineers, and manufactures driveline and metal forming technologies that support electric, hybrid and internal combustion vehicles. AXL operates through two segments — Driveline and Metal Forming. AXL manufactures Driveline and Metal Forming technologies to support electric, hybrid and internal combustion vehicles. AXL operates with around 80 facilities in 18 countries.
American Axle & Manufacturing Holdings has expected revenue and earnings growth rates of 3.1% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.3% over the last 60 days.
Enviri Corp. (NVRI - Free Report) provides environmental solutions for industrial and specialty waste streams in the United States and internationally. NVRI operates through two segments: Harsco Environmental and Clean Earth. NVRI serves a diverse customer base by offering critical recycle and reuse solutions for their waste streams.
Enviri has expected revenue and earnings growth rates of 17.4% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 60 days.
Groupon Inc. (GRPN - Free Report) is benefiting from growing momentum across local and travel categories, particularly in the North America region. Increasing gift orders on the back of its v1.0 offering and growing focus on enhancing GRPN’s sorting and ranking algorithms to generate giftable deal feeds, is a positive.
Solid demand across GRPN’s enterprise customers is a plus. Groupon’s growing efforts to improve deal recommendation and quality assurance on the back of AI are contributing well to its top-line growth. GRPN’s cost reduction initiatives, such as the cloud cost optimization and ERP simplification projects, are acting as a tailwind.
Groupon has an expected revenue and earnings growth rate of 1.3% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last seven days.
BJ's Restaurants Inc. (BJRI - Free Report) is benefiting from productivity and margin enhancement initiatives and operational excellence across its restaurants. Also, BJRI’s expansion, remodel and digital initiatives are encouraging for its prospects.
BJRI anticipates opening approximately 130 additional restaurants and benefits from a specific aspect of the remodel program. BJRI is optimistic and anticipates the strategy to pave a path for increased sales and foot traffic in the upcoming periods.
BJ's Restaurants has an expected revenue and earnings growth rate of 1.1% and 65.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.6% over the last 60 days.
GeneDx Holdings Corp. (WGS - Free Report) provides genomics-related diagnostic and information services. WGS provides genetic diagnostic tests, screening solutions, and information with a focus on pediatrics, rare diseases for children and adults, and hereditary cancer screening.
WGS offers Centrellis, an AI-driven health intelligence platform that integrates digital tools and artificial intelligence allowing scientists to ingest and synthesize clinical and genomic data to deliver comprehensive health insights.
GeneDx Holdings has an expected revenue and earnings growth rate of 18.9% and 82.3%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 60 days.
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Small Caps Climb on Interest Rate Cut Expectations: 5 Picks
Small-cap stocks (market capital < $1 billion) received a boost this month following the release of two key inflation data, which showed that the inflation rate is dwindling steadily. This along with soft economic data, especially the resilient labor market data, has raised rate cut hopes. Finally, Fed Chairman Jerome Powell’s recent comments significantly boosted market participants’ expectations of the first rate cut in September.
Wall Street has been witnessing an impressive bull run in the past 18 months. The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — jumped during this period. However, small-cap specific benchmarks — the Russell 2000 and the S&P 600 — remained laggards on a sticky inflation rate and uncertainty on interest rate cut.
Following recent developments, on Jul 16, the Russell 2000 surged 3.5% to close at 2,263.67. In intraday trading, the index touched 2,265.21, hitting its highest level since January 2022. Bespoke Investment Group reported that this is the fifth time since 1979 that the Russell 2000 recorded a positive closing for the fifth consecutive day with more than 1% gain every day. On Jul 16, the S&P 600, another small-cap-centric benchmark, advanced 3.6% to close at 1,418.30. In intraday trading, the index touched a 52-week high of 1,419.54.
Inflation is Dwindling
The Department of Labor reported that the consumer price index (CPI) decreased 0.1% month over month in June, in contrast to the consensus estimate of an increase of 0.1%. The reading for May was flat month over month. This marked the first monthly decrease in headline CPI since May 2020. Year over year, CPI increased 3%, marking the lowest level in more than three years. The metric for May was 3.3%.
The core CPI (excluding volatile food and energy items) increased 0.1% month over month in June, lower than the consensus estimate of an increase of 0.2%. The reading for May was also 0.2%. Year over year, core CPI increased 3.3%, marking the smallest annual increase since April 2021. The metric for May was 3.4%.
The Department of Commerce reported that the core personal consumption expenditure (PCE) price index (excluding volatile food and energy items) rose 0.1% month over month in May compared with 0.3% growth in April. Year over year, core PCE inflation — the Fed’s most favorite inflation gauge — rose 2.6% in May compared with 2.8% in April. May marked the lowest monthly rise of this metric since March 2021.
Powell’s Comments
On Jul 15, speaking at the Economic Club of Washington D.C., Fed Chairman Jerome Powell said that the central bank may not wait for the inflation rate to cool to its target 2% for implementing interest rate cut.
According to Powell, “The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%. The Fed is looking for greater confidence and what increases that confidence in that is more good inflation data, and lately here we have been getting some of that.”
Rate Cut Expectations Rise
Notably, the benchmark interest rate is currently in the range of 5.25-5.5%, marking the highest level in 23 years. The yield on the benchmark 10-Year U.S. Treasury Note fell to 4.166% from 4.793% in mid-April.
The CME FedWatch tool currently shows a 100% probability of a Fed fund rate cut by 25 basis points in September. This probability was around 62% in late June. Moreover, the interest rate derivative tool also shows a 96% probability of two rate cuts by the end of 2024.
Our Top Picks
We have narrowed our search to five small-cap stocks. These stocks have strong growth potential for the rest of 2024 and have seen positive earnings estimate revisions in the last 60 days. Finally, 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.
American Axle & Manufacturing Holdings Inc. (AXL - Free Report) designs, engineers, and manufactures driveline and metal forming technologies that support electric, hybrid and internal combustion vehicles. AXL operates through two segments — Driveline and Metal Forming. AXL manufactures Driveline and Metal Forming technologies to support electric, hybrid and internal combustion vehicles. AXL operates with around 80 facilities in 18 countries.
American Axle & Manufacturing Holdings has expected revenue and earnings growth rates of 3.1% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.3% over the last 60 days.
Enviri Corp. (NVRI - Free Report) provides environmental solutions for industrial and specialty waste streams in the United States and internationally. NVRI operates through two segments: Harsco Environmental and Clean Earth. NVRI serves a diverse customer base by offering critical recycle and reuse solutions for their waste streams.
Enviri has expected revenue and earnings growth rates of 17.4% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 60 days.
Groupon Inc. (GRPN - Free Report) is benefiting from growing momentum across local and travel categories, particularly in the North America region. Increasing gift orders on the back of its v1.0 offering and growing focus on enhancing GRPN’s sorting and ranking algorithms to generate giftable deal feeds, is a positive.
Solid demand across GRPN’s enterprise customers is a plus. Groupon’s growing efforts to improve deal recommendation and quality assurance on the back of AI are contributing well to its top-line growth. GRPN’s cost reduction initiatives, such as the cloud cost optimization and ERP simplification projects, are acting as a tailwind.
Groupon has an expected revenue and earnings growth rate of 1.3% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last seven days.
BJ's Restaurants Inc. (BJRI - Free Report) is benefiting from productivity and margin enhancement initiatives and operational excellence across its restaurants. Also, BJRI’s expansion, remodel and digital initiatives are encouraging for its prospects.
BJRI anticipates opening approximately 130 additional restaurants and benefits from a specific aspect of the remodel program. BJRI is optimistic and anticipates the strategy to pave a path for increased sales and foot traffic in the upcoming periods.
BJ's Restaurants has an expected revenue and earnings growth rate of 1.1% and 65.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.6% over the last 60 days.
GeneDx Holdings Corp. (WGS - Free Report) provides genomics-related diagnostic and information services. WGS provides genetic diagnostic tests, screening solutions, and information with a focus on pediatrics, rare diseases for children and adults, and hereditary cancer screening.
WGS offers Centrellis, an AI-driven health intelligence platform that integrates digital tools and artificial intelligence allowing scientists to ingest and synthesize clinical and genomic data to deliver comprehensive health insights.
GeneDx Holdings has an expected revenue and earnings growth rate of 18.9% and 82.3%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 60 days.