Small-caps have been on a tear this year clearly outperforming its larger counterparts. The Russell 2000 is +9.2% this year while the S&P 500 has advanced about 2.9% in the year-to-date frame.
The blue-chip index kicked off 2018 on a strong footing but couldn’t maintain its upper hand over the pint-sized index after trade war talks started flaring up in March.
The Russell 2000 crossed the S&P 500 in mid-March and there was no looking back for the small-cap gauge since then. This is because President Trump’s protectionist agenda and the resultant trade war fears started weighing on large-cap stocks that have considerable international exposure.
In additions to trade tensions, there were some other factors that played their roles in pushing pint-sized stocks higher. The U.S. economy has been on the steady ground. This gave a boost to small-cap equities. Apart from this, upbeat earnings sent small caps rallying in recent times.
The tax reform is yet another tailwind to the segment as it is supposed to favor small-caps more. This is because companies on the Russell 2000 pay a higher median effective tax rate than the S&P 500, per Thomson Reuters. Now the question that arises is how long the rally will continue.
Is the Rally Triggering Overvaluation Concerns?
Per Bloomberg, small-cap stocks are trading at an average of about 26 times their expected earnings during the next year. On the other hand, large-company stocks on the S&P 500, are trading at a much cheaper valuation of 17 times.
Agreed, small-caps normally have higher valuation due to higher expected growth rates, but many may start seeing overvaluation issues in some small-cap stocks. After such a strong rally, profit booking activity seems normal. So, it would be intriguing to pick some inexpensive small-cap ETF buys at the current moment.
Given this, we would like to highlight some small-cap stocks that have P/E less than that of the average small-cap stocks for next year or fiscal 2019, have a Zacks Rank #1 (Strong Buy) and belong to a top-ranked Zacks industry.
Commercial Vehicle Group Inc. (NASDAQ:CVGI)
The company supplies interior systems, vision safety solutions and other cab-related products for the global commercial vehicle market. The stock hails from a top-ranked Zacks industry (top 41%).
P/E (F1) – 5.70x
P/E (F2) – 5.49x
Bonanza Creek Energy Inc. (NYSE:BCEI)
The company is engaged in the acquisition, exploration and development of onshore oil and natural gas properties in the United States. The stock belongs to a top-ranked Zacks industry (top 11%).
P/E (F1) – 7.26x
P/E (F2) – 4.13x
Delta Apparel Inc. (NYSEAMERICAN:DLA)
The company is a vertical manufacturer of knitwear products for the entire family. The stock hails from a top-ranked Zacks industry (top 13%).
P/E (F1) – 12.78x
P/E (F2) – 10.95x
IEC Electronics Corp. (NYSEAMERICAN:IEC)
It is contract manufacturer employing state-of-the-art production utilizing both surface mount and pin-through-hole technology. The stock is from a top-ranked Zacks industry (top 19%).
P/E (F1) – 13.35x
P/E (F2) – 8.72x
America’s Car-Mart Inc. (NASDAQ:CRMT)
It is one of the largest automotive retailers in the United States. The stock belongs to a top-ranked Zacks industry (top 4%).
P/E (F1) – 14.54x
P/E (F2) – 13.38x
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