Most of the stocks ended 2016 in green, thanks to the post-election rally. While the year began on a sour note given several concerns plaguing the markets, the rally in the last two months mitigated losses to a great extent.
The small-cap companies, whose financial performance is primarily tied with the domestic economy, were one of the biggest winners in 2016. During the year, the Russell 2000 (index of small and mid-sized U.S. companies) soared 22.4% compared with the S&P 500’s gain of 11.2%.
A majority of the gain in the Russell 2000 index was in the last two months, driven by the U.S. Presidential election results and the Fed rate hike, which indicates strong domestic economy. With Donald Trump elected as the next President, certain potential financial policy changes are expected to aid several small-cap companies.
The economic growth is likely to further strengthen as the Trump-administration promises to mainly focus on domestic economy, lower tax rates and enhance infrastructure spending. This should significantly support small-cap stocks, as they are less susceptible to global concerns.
However, there are several small-cap companies that may fail to capitalize on the favorable trends. There could be many reasons for such performance including increased competition, weak fundamentals and slowdown in the sector fundamentals.
Therefore, you should be careful about riding the small-cap rally. Before betting on small-cap stocks, you should check their fundamental strengths and weaknesses.
Small-Cap Stocks to Avoid
While it is a difficult task to choose small-cap stocks that are likely to disappoint in 2017, we have taken the help of the Zacks Stock Screener to easily select such stocks.
We have shortlisted stocks with a market capitalization of $1.5 billion or less and a VGM Score of D or F. Further, these stocks carry a Zacks Rank #4 (Sell) or #5 (Strong Sell).
To further cut short the list, we choose stocks that lost 15% or more over the last 52 weeks. In addition, these stocks witnessed 10% or more downward revision in 2017 earnings estimates over the last four weeks.