3 small actions with big prospects – July 12, 2022

Small stocks aren’t usually the best place to be when the Fed is carefully engineering a downturn in the economy (even if a full crash isn’t part of the plan!).

Yet inflation is the bull that simply needs to be pointed out, or at least grabbed by the horns before things spiral out of control. Statistics from the Bureau of Economic Analysis (BEA) show that while personal income continued to grow in May, the savings rate continued to fall, driven by consumer spending, which continued to rise.

Spending rose the most in housing (where we just don’t have enough inventory), energy (where prices are killing us) and other services, including travel and leisure-related services ( where the request is rejected). Although some accommodations and many services are non-essential, the same cannot be said for food, drink and energy. This is why inflation has become a problem that must be solved immediately.

And so, the Fed is doing its job.

The only thing still supporting the Fed are income levels. An unemployment rate below 4% can be considered full employment, although things have changed slightly over the past two months. Additionally, job vacancies, although down from their peak in March, still remain very high at 1.9 per jobless. Since the quit rate fell to a 4-month low in May, we can probably say that the employment situation is stable.

However, more recent data indicate a slight deterioration in the situation since May. The increase in unemployment insurance claims, for example, indicates that job cuts may have increased somewhat since April. But independent market reports suggest that most of these reductions could be in certain sectors such as automotive (a number of factors including supply constraints, labor constraints, high fuel costs , etc. weigh on it) and smaller technologies (difficult compositions). However, a broader reduction could be envisaged.

Looking at things, we can say that the situation has to get worse before it gets better. For example, it would be nice to see house prices drop and people cool their travel plans this summer. But we are not there yet. And we could have negative GDP and job losses instead.

So normally I wouldn’t recommend anything other than the safest large cap stocks. The main reason I’m breaking with this theory is that there are ways to put less money into the job (if that’s what you can save now).

The proven Zacks methodology helps you pick stocks that outperform the market. Take a look at the Zacks Rank #1 (Strong Buy) list first and select only stocks that belong to attractive industries ranked by Zacks, i.e. the top 50%.

It has been seen historically that a #1 ranked stock, when it belongs to the 50% of industries ranked by Zacks, has an above average chance of short term upside. Then take a look at the trend of estimate revisions. When all of these factors are favorable, chances are you have picked a winner. Let’s take a few examples:

Blue Green Vacation (BVH Free report)

Zacks #1 rated Bluegreen Vacations sells Vacation Ownership Interests (VOI) and manages resorts in leisure and urban destinations.

With travel still high on everyone’s mind, the recreation and leisure services industry that Bluegreen belongs to still looks attractive. It is therefore part of the 26% of industries ranked by Zacks.

The VOI/timeshare model the company has adopted helps cover maintenance costs and occupancy issues even in off-season and when people are not traveling for other reasons, such as during a recession. So it’s a better model for the present day.

The two analysts providing estimates see revenue rising 11% and 3% in 2022 and 2023, respectively. Profits are expected to rise 35% and 11%, respectively. The 2022 revenue estimate has increased by 5% over the past 60 days, while the 2023 estimate has increased by 8%.

At 6.1 times forward earnings, stocks are very cheap.

Bowman Consulting Group (BWMN Free report)

Bowman Consulting provides engineering, construction management and related services in the real estate, energy, infrastructure and environmental sectors. The US-centric company has a No. 1 Zacks rank.

It belongs to the Business – Services industry (top 32%). Construction work is in full swing despite recession fears. All of the markets Bowman targets have secular engines.

Bowman’s estimate for the current year has jumped 124% in the past 60 days. The 2023 estimate has increased by 10%. Current year profits are expected to increase by 1167% on revenues which are expected to increase by 45%. Next year, profits will increase by 45% on revenue growth of 15%.

At 23.9 times earnings, stocks aren’t exactly cheap, but they’re at the lowest point in their annual range over the past year.

Commercial Bank of the Bay (BCML Free report)

Zacks, ranked number 1, Bay Commercial provides various financial services to small and medium-sized businesses, service professionals and individuals. It belongs to the Banks–West industry (top 16%).

Bay Commercial’s estimates have increased over the past 60 days. The 2022 estimate increased by 5% and the 2023 estimate increased by 6%.

Revenue and profit are expected to grow 27% and 23% respectively. They are expected to grow by 7% and 9% respectively next year.

At 8.4 times earnings, the shares are definitely worth considering at this point.

One month price performance

Image source: Zacks Investment Research

Garland K. Long