Wall Street has been performing very well during the pandemic despite volatile trading in September and October. The resurgence of coronavirus cases has failed to dampen market participants' sentiments owing to positive developments on the vaccine front and hopes of a Congressional agreement for a fresh round of fiscal stimulus.

Aside from large-cap stocks, small-cap stocks have also performed impressively in 2020. Year to date, large-cap-specific indexes — the Dow, the S&P 500, and the Nasdaq Composite — have rallied 5.1%, 13.5%, and 38.3%, respectively. The small-cap centric Russell 2000 and the S&P 600 indexes have jumped 15.2% and 7.3%, respectively.

Several small-cap (market capita < $1 billion) stocks have skyrocketed in this year so far. At this stage, investment in top-ranked stocks with strong growth potential for next year will be prudent.

Stimulus Helps in Revival of Small Businesses

In March 2020, the U.S. government provided more than $800 billion to small businesses as part of the CARES Act, which ended in July.  In June 2020, the Fed initiated a lending program of up to $600 billion to small and mid-sized businesses. Under this program, businesses with up to 15,000 employees or revenues of up to $5 billion will get a loan in the range of $250,000 to $300 million for 5 years at floating rate.

On Oct 30, the central bank reduced the minimum loan size to $100,000 from $250,000 and decided to ease restrictions on debt for companies already participating in the Paycheck Protection Program. The central bank will encourage retail banks to lend out to struggling companies and will purchase 95% of each loan extended under the facility.

Given their small-scale of operations, small businesses are generally cash-starved. These organizations operate on a thin profit margin and most new businesses are yet to achieve profitability.

Expectations for More Stimulus

On Dec 1, a bipartisan group of lawmakers proposed a $908 billion fresh coronavirus-aid package. The major components of the proposed bipartisan relief bill includes $160 billion for state, local and tribal governments, $180 billion for additional unemployment insurance, and $288 billion as support to small businesses including the Paycheck Protection Program.

On Dec 8, Treasury Secretary Steven Mnuchin unveiled a $916 billion stimulus proposal. Senate Majority Leader Mitch McConnell also agreed to introduce a new unemployment benefit scheme and Paycheck Protection Program for small business loans.

Owing to their predominantly domestic-focused business strategy, these companies are highly dependent on the spending of U.S. consumers as well as businesses. However, the lockdown imposed by a large number of states due to the resurgence of COVID-19, significantly reduced demand from both individuals and medium and large businesses.

Therefore, the reopening of the economy will immensely benefit small businesses. The National Federation of Independent Business (NFIB) Small Business Optimism Index remained above its historical average of 98 in the last four months.

Our Top Picks

We have narrowed down our search to five small-cap stocks that have popped more than 25% year to date. These stocks have strong growth potential for 2021 and have witnessed robust earnings estimate revisions in the last 7 to 60 days. Each of our picks sports a Zacks Rank #1 (Strong Buy). 

The chart below shows the price performance of our five picks year to date.

Strattec Security Corp. (STRT Quick Quote STRT - Free Report) designs, develops, manufactures, and markets automotive access control products under the VAST brand primarily in the United States. The company has an expected earnings growth rate of more than 100% for the current year (ending June 2021). The Zacks Consensus Estimate for next year has improved 10.7% over the last 30 days. The stock price has soared 103.8% year to date.

MarineMax Inc. (HZO Quick Quote HZO - Free Report) is the largest recreational boat and yacht retailer in the United States. It sells new and used recreational boats, including pleasure boats, motor, and convertible yachts, pontoon boats, fishing boats, ski boats, and jet boats.

The company has an expected earnings growth rate of 12% for the current year (ending September 2021). The Zacks Consensus Estimate for the current year has improved 57.6% over the last 60 days. The stock price has jumped 87.1% year to date.

Smith & Wesson Brands Inc. (SWBI Quick Quote SWBI - Free Report) designs, manufactures, and sells firearms. It offers pistols, revolvers, rifles, handcuffs, and other related products and accessories. The company has an expected earnings growth rate of more than 100% for the current year (ending April 2021). The Zacks Consensus Estimate for current-year earnings has improved 412% over the last 7 days. The stock price has climbed 72.8% year to date.

Schnitzer Steel Industries Inc. (SCHN Quick Quote SCHN - Free Report) produces, processes, markets, and distributes fresh, frozen, and prepared chicken products in the United States. The company has an expected earnings growth rate of more than 100% for the current year (ending August 2021). The Zacks Consensus Estimate for current-year earnings has improved 16.3% over the last 30 days. The stock price has surged 36.3% year to date.

Titan Machinery Inc. (TITN Quick Quote TITN - Free Report) owns and operates a network of full-service agricultural and construction equipment stores. It operates through three segments: Agriculture, Construction, and International.

The company has an expected earnings growth rate of 45.6% for the current year (ending January 2021). The Zacks Consensus Estimate for current-year earnings has improved 30.7% over the last 30 days. The stock price has advanced 28.6% year to date.