Think Small To Gain From Coronavirus-Led Volatility: 5 Picks

The rapid spread of coronavirus worldwide and its potential impact on the global economy has finally caught up with Wall Street. Notably, Wall Street took a tumble in the prior week amid uncertainty regarding the much-anticipated recovery of the global economy. The Chinese economy, which acts as the backbone of the global supply-chain system, is in a jeopardy.

Consequently, the three major stock indexes – the Dow, the S&P 500 and the Nasdaq Composite – posted weekly loss in the last week. Month to date, these indexes, primarily consisting of large-cap stocks, have gained 2.6%, 3.5% and 4.7%, respectively.

However, the small-cap centric Russell 2000 index (RUT) rallied 4% so far this month. Notably, the coronavirus outbreak has become severe across the world in February.

Small Businesses Thrive Despite Coronavirus Threat

The two important studies have clearly showed that small businesses maintained strong momentum so far this year. On Feb 11, the National Federation of Independent Business (NFIB) reported that the NFIB Small Business Optimism Index rose to 104.3 in July from 102.7 in December.

On Feb 20, the CNBC/SurveyMonkey reported that its Small Business Confidence Index rose to 61 from 59 in first-quarter 2020. The data were collected for the period of Feb 3 to Feb 10, among a national sample of 2,118 small business owners.

According to the NFIB chief economist William Dunkelberg, “Small businesses continue to build on the solid foundation of supportive federal tax policies and a deregulatory environment that allows owners to put an increased focus on operating and growing their businesses.”

The CNBC/SurveyMonkey survey has revealed that business owners are feeling more positive about business, with 56% saying conditions are good, while only 7% remained apprehensive.

Domestic-Focused Nature of Small Businesses

In fact, owing to their predominantly domestic-focused business strategy, small business organizations are generally immune to any external shocks like the coronavirus outbreak. This helps small-cap stocks to outperform the broader market defying extreme volatility.

Further, as the recovery of global economic growth becomes more uncertain, market participants are increasingly seeking safe-haven assets like U.S. dollar-denominated assets. Consequently, price of the U.S. Dollar index has risen to a three-year high.

This renders U.S. exports uncompetitive internationally. However, as small business organizations primarily depend on domestic market, adverse movement of foreign-exchange rate will not hurt them.

Small corporates create a significant amount 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.

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Moreover, small companies are 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.

Our Top Picks

At this juncture, investment in domestic-business-focused small-cap stocks will be fruitful. We have narrowed down our search to five such stocks with strong growth potential. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Zacks Investment Research

Written By: Zacks Investment Research