Decline in oil prices and China led weak global growth worries had weighed on the key U.S. indexes during the start of this year. However, a recovery in oil prices and encouraging economic data, mainly on the domestic front, helped benchmarks to rebound strongly in the latter half of the first quarter. Both the Dow and the S&P 500 have gained 3.3% and 2.5%, year to date, respectively. Meanwhile, the small-cap heavy Russell 2000 index surged 13.1% in trailing three months.

Though small cap stocks are considered to be high-risk investment options given their low market cap, investing in small cap growth stocks could be a profitable proposition at this time. Markets are stabilizing and economic data has been mostly favorable. Moreover, the CBOE Volatility Index (VIX) has declined 26.7% year to date to nearly 13, indicating that volatility in the U.S. markets remains low. For investors with high risk appetite and return expectations, small cap growth stocks are the best bet given the current market environment.

Oil Price Rally

After reaching multi-year lows on Feb 11, oil prices have made a remarkable comeback on the back of favorable production forecasts and a continuous decline in oil rig counts. Since Feb 11, the prices of WTI and Brent crude have jumped 51.4% and 42.7%, respectively.  Though a much-vaunted meeting between the major oil producing countries in Doha regarding production freeze failed to produce favorable results on Sunday, its impact on crude was lesser than expected.

Moreover, non-OPEC oil supply continues to decline, borne out by the fall in U.S. output. On Monday, the Energy Information Administration (EIA) reported a fall in U.S. crude output by 90,000 bpd to 9 million bpd in March. The EIA also reduced its production forecast from last month’s outlook by 100,000 bpd to 8.6 million bpd and 8.0 million bpd in 2016 and 2017, respectively.

Also, following an oil worker strike in Kuwait, its oil production fell from almost 3 million barrels per day (bpd) to 1.1 million bpd on Sunday. This played an important role in curbing most of yesterday’s crude price decline. Meanwhile, last Friday, Baker Hughes (BHI - Analyst Report) reported a drop in U.S. oil rig count for the fourth straight week from 354 to 351, its lowest level since Nov 2009.

Encouraging Domestic Data

Recent domestic economic data has created fresh optimism among investors. The ISM manufacturing index increased from 49.5% in February to 51.8% in March, higher than the consensus estimate of 50.8%. The ISM Services Index increased from 53.4% in February to 54.5% in March, witnessing its highest level in the last three months.

While the U.S. economy generated better-than-expected 215,000 jobs in March, average hourly earnings gained 0.3% last month to $25.39 per hour. Average hourly earnings also witnessed a 2.5% rise from the year-ago figure.

Additionally, fourth quarter GDP data was revised upward to 1.4% from the previously estimated 1% increase. Moreover, consumer spending increased 2.4% in the fourth quarter and 3.1% in 2015. Consumer Confidence Index advanced to 96.2 in March from 92.2 in February and was also more than the consensus estimate of 94.9. Meanwhile, all  the  12  districts  indicated  moderate  growth  in  economic  activity,  according  to  the Fed’s Beige Book.

4 Potential Small Cap Growth Stocks

Given this encouraging backdrop, small cap growth stocks, which are believed to have a stronger linkage with the domestic economy, provide an excellent investment avenue. While growth stocks are also called “glamour stocks” because of the superior returns they offer, small cap growth stocks may offer even higher returns, despite being risky bets.

With the help of our new style score system, we have zeroed in on four stocks with market cap of below $1 billion that look promising based on their encouraging Zacks Rank and favorable Growth Style Score.

Our Growth Style Score condenses all the essential metrics from a company’s financial statements to get a true sense of the quality and sustainability of its growth. Our research shows that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best investment opportunities in the growth investing space.

Forestar Group Inc (FOR - Snapshot Report) has two distinct business segments, real estate segment and oil and gas segment.

The real estate as well as oil and gas company has a Zacks Rank #1 and a Growth Style Score of ‘A’. The company has a market cap of $455.03 million. The projected EPS growth of the company for the current year stands at more than 100%, compared with the industry average of 2.66%. The long-term expected EPS growth rate for the company is 53.63%.  

Chuy's Holdings, Inc. (CHUY - Snapshot Report) owns and operates 70 full-service restaurants in 14 states in Midwestern and Southeastern United States.

The restaurant chain company has a Zacks Rank #2 and a Growth Style Score of ‘A’. The company has a market cap of $495.28 million.  The projected EPS growth of the company for the current year stands at 13.03%, compared with the industry average of 14.74%. The long-term expected EPS growth rate for the company is 20.01%.      

Gibraltar Industries, Inc. (ROCK - Analyst Report) has diverse business segments including residential products segment, industrial and infrastructure products segment and renewable energy and conservation segment.

This manufacturer and distributor of building products has a Zacks Rank #2 and a Growth Style Score of ‘A’. The company has a market cap of $867.13 million. The projected EPS growth of the company for the current year stands at 21.72%.The long-term expected EPS growth rate for the company is 25.55%.  

Perficient Inc. (PRFT - Snapshot Report) offers management consulting and information technology services in the U.S.

The company has a Zacks Rank #2 and a Growth Style Score of ‘A’. The company has a market cap of $763.34 million. The projected EPS growth of the company for the current year stands at 22.68%, compared with the industry average of 3.57%. The long-term expected EPS growth rate for the company is 23.51%.