Earnings estimates for small-cap companies have declined since last year, but deep cuts in the energy industry mask an otherwise healthy trend for other stocks, according to Barclays Capital. The bank named 17 small-cap stocks as potential winners.
Small-cap companies listed in the Russell 2000 index have lowered their earnings estimates by 5.2 percent since October while the benchmark has risen 5.5 percent.
“Historically, the combination of falling forward EPS estimates and rising markets is a bad sign for small caps,” Venu Krishna, small and mid-cap strategist at Barclays, said. “However, if the energy sector is removed from consideration, then the Russell 2000’s forward EPS would go from a 5.2 percent decline since October to a 0.4 percent gain.”
Companies listed in the Russell 2000 have a median market value of $737 million, according to Russell Investments
. The index has gained an average 16.6 percent annually for the past three years. Meanwhile, energy stocks have come under pressure with the crash in oil prices to six-year lows.
“When the market is rising and forward EPS revisions are positive, returns are much better the subsequent six months (averaging 5.7 percent),” Krishna said in a March 16 report
obtained by Newsmax Finance.
He has overweight ratings on the technology, industrials and consumer discretionary industries, and is cautious toward the materials industry, which includes producers of commodities.
Barclays further winnowed down its selection of small-caps to companies with comparably high three-month revisions to normalized earnings, which are adjusted for cyclical ups and downs in the economy. Finally, the bank selected stocks that have individual overweight ratings by its industry analysts.
Barclays Small-Cap Stock Screen
(Company Name, Ticker)
- Penn National Gaming (PENN)
- G-III Apparel Group (GIII)
- Dana Holding (DAN)
- Vail Resorts (MTN)
- AMC Entertainment Holdings (AMC)
- American Axle & Manufacturing (AXL)
- Meritor (MTOR)
- Interface (TILE)
- Continental Building Products (CBPX)
- Knight Transportation (KNX)
- Swift Transportation (SWFT)
- Cirrus Logic (CRUS)
- Mobileiron (MOBL)
- Gigamon (GIMO)
- M/A-Com Technology (MTSI)
- Ellie Mae (ELLI)
- GrubHub (GRUB)
Smaller-cap companies have boosted dividends at “a vigorous pace” in the past 15 months, according to the Financial Times
The percentage of companies in the Standard & Poor’s 600 small-cap index that pay a dividend has jumped by a tenth since the end of 2013, with yields for the average paying company up 17.8 percent, the newspaper reported, citing S&P Dow Jones Indices.
The dividend hike is a sign that company managers are confident about the business outlook, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
“More small-caps are paying, with their yields higher to dividends and their underperformance in the market,” he told the Financial Times. “This represents a broad commitment of future earnings, for which companies need to be very sure of their future cash flow.”
© 2017 Newsmax Finance. All rights reserved.