It seems that there are no stopping small-cap stocks. Expectations that the Trump administration will introduce industry-friendly, domestic-focused policies have helped small caps post record gains over the last month. This is why the category has set a frenetic pace ever since his surprise victory, easily outpacing the broader market’s gains.

Apart from a small dip last week, gains for this category have been more or less uninterrupted. Given the state of the economy and prevailing expectations about forthcoming policies, it is quite likely that such gains will continue into the New Year. Investing in small-cap stocks with superior fundamentals will make for a profitable choice even in 2017.

Best Monthly Gains for Russell 2000 in 5 Years

The Russell 2000 Index of small-cap stocks registered its best monthly gains since Oct 2011 in November. The index moved 11.2% higher over the month, outperforming the S&P 500, which gained 3.4%. While the Dow gained 5.4% last month, the Nasdaq notched up its highest gains since July, increasing 1.1%.

Gains for the small-cap index were largely attributable to a rally sparked off by the results of the presidential election. Additionally, the index registered its longest stretch of gains since Feb 1996 last month. This fifteen-session long stretch of gains ultimately came to a halt on Nov 25. At that point, the Russell 2000 had gained 12.7% since Nov 8, significantly higher than the S&P 500’s advance of 3.5% registered over the same period.

Trump Powers Small Caps Ahead of Others

Market watchers and analysts alike feel that while a Trump administration will be good for the broader markets, it will benefit small cap stocks even more. Most of Trump’s economic policies are likely to be focused on the domestic economy and will benefit small caps substantially more. Trump has promised to ease regulations, cut taxes and boost infrastructure spending.

With financials, healthcare and energy stocks making up the bulk of small caps, the category is likely to benefit the most from these measures. Additionally, small caps usually have the highest effective tax rates since larger internationally diversified corporations park a large share of their profits abroad. Additionally, Trump has pledged to renegotiate crucial trade agreements, which is also likely to benefit small caps.

Are Such Gains Sustainable?

Historical trends indicate that such a long stretch of gains has a tendency to continue. For instance, in 1996, the Russell 2000 gained 2.2% over its first month of gains and moved 8.4% higher over the following three months. Other trends suggest that the year following a presidential election is mostly a profitable one for the S&P 500.

Only once in the last eight elections has the S&P 500 finished in the red. However, the Russell 2000 index has surpassed the index by a wide margin, registering an average gain of 20.2%. In fact, small-cap growth stocks have posted 34% plus gains in the last two years following an election.

Our Choices

Going into 2017, small-cap stocks will likely benefit from the Trump administration’s policy measures. Additionally, historical trends suggest that the current run of gains will continue for a considerable period of time. Over the last one month, the Russell 2000 has gained 12.2%.

As we near 2017, adding small-cap stocks to your portfolios seems to a smart choice. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

Each of the stocks selected has a VGM Score of A and have registered strong gains over the last one month. Also, they have a Zacks Rank #1 (Strong Buy).

Health Insurance Innovations, Inc. (HIIQ - Free Report) operates as a developer and administrator of web-based individual health insurance plans and ancillary products.

Health Insurance Innovations has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 2.2% over the last 30 days. The stock has returned 111.9% over the last 30 days, outperforming the Zacks Life Insurance sector, which has returned 10.9% over the same period.

Aegean Marine Petroleum Network Inc. (ANW - Free Report) is a marine fuel logistics company that physically supplies and markets refined marine fuel and lubricants to ships in port and at sea.

Aegean Marine Petroleum Network has expected earnings growth of 46.6% for the current year. Its earnings estimate for the current year has improved by 5.2% over the last 30 days. The stock has returned 41.8% over the last 30 days, outperforming the Zacks Transportation Shipping sector, which has returned 7.3% over the same period.

KVH Industries, Inc. (KVHI - Free Report) is a leading provider of in-motion satellite TV and communication systems.

KVH Industries has expected earnings growth of more than 100% for the current year. The stock has returned 40.4% over the last 30 days, outperforming the Zacks Communications Components sector, which has returned 3% over the same period.

Sucampo Pharmaceuticals, Inc. (SCMP - Free Report) is a global biopharmaceutical company, which primarily focuses on the research, discovery, development and commercialization of proprietary drugs to treat gastrointestinal and oncology-based inflammatory disorders.

Sucampo Pharmaceuticals has expected earnings growth of 23.2% for the current year. Its earnings estimate for the current year has improved by 18.1% over the last 30 days. The stock has returned 35.2% over the last 30 days, outperforming the Zacks Medical Drugs sector, which has returned 3.7% over the same period.

Willdan Group, Inc. (WLDN - Free Report) is a provider of professional technical and consulting services to utilities, private industry, and public agencies at all levels of government.

Willdan Group has expected earnings growth of 82.7% for the current year. The stock has returned 30.4% over the last 30 days, outperforming the Zacks Engineering R&D Services sector, which has returned 23.2% over the same period.