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The ‘emerging’ Midwest is hiding these underappreciated small-cap stocks, says fund manager

researchsnappy by researchsnappy
January 28, 2020
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The ‘emerging’ Midwest is hiding these underappreciated small-cap stocks, says fund manager
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The stock market could use a distraction right now, as the coronavirus death toll hits 106 and the number of infected people in China tops 4,500. Germany confirmed its first case.

Earnings from Apple












AAPL, +1.26%










and chip maker AMD












AMD, +1.29%,










due after the close, might do the trick. For now, investors look ready to dip a toe into stocks after Monday’s rout, though much may be riding on Apple, and coronavirus headlines have the power to keep rattling markets.

Our call of the day steps away from the headlines to zero in on overlooked small-cap companies in the so-called emerging U.S. Midwest, provided by Christopher S. Beck, chief investment officer of Macquarie’s small-mid cap value equity team.

“Small-caps by definition have tended to be higher risk than large-caps, but they’ve also over time tended to have better returns, and frankly if you look at any long-term charts, small-cap value has been a great place to be,” he says. While it hasn’t been a great place to be in the past 10 years versus small cap-growth, he believes that will change.

After all, Beck said, from 1979 to about 2009, small-cap value — cheaper, unloved stocks — was a great place for investors to be. Many of the stocks in his portfolio benefit from running operations out of the less-costly Midwest, and investors can sidestep currency conversions due to companies’ domestic focus.

KeyCorp












KEY, +0.96%,










an Ohio-based regional bank with a market capitalization of about $20 billion, is one of his portfolio picks. He likes the bank for its decent deposit and loan growth, and cash that it has been returning to shareholders via buybacks and dividends. Shares are up 11% over 12 months.

He also likes Hess Corporation












HES, +0.49%,










the roughly $20 billion market-cap energy company, which pays a dividend and has “decent operations” in the oil-producing North Dakota Bakken region. Five years from now, he projects Hess will produce a lot of crude, alongside Exxon












XOM, +0.44%.










Shares are up 20% in 12 months.

MasTec












MTZ, -1.07%,










the engineering infrastructure group that builds pipelines for energy transport to the Gulf or East Coast, is one of his biggest holdings. “This is a company that would have modest capital spending needs, it’s all funded by projects that they win,” says Beck, adding that 98% of the around $4.8 billion market cap company’s work is done in the U.S. Shares are up 31% in a year.

The market

The Dow












DJIA, +0.41%










 , S&P












SPX, +0.64%










  and Nasdaq












COMP, +0.79%










  are modestly higher in early action after Monday’s rout. European stocks












SXXP, +0.54%










are wobbling, while South Korea’s Kospi












180721, -3.09%










 slid 3% and Singaporean stocks












STI, -1.81%










 fell 2%. China’s securities regulator has pleaded for investors to “objectively” evaluate coronavirus risks ahead of the reopening of the Chinese stock markets next Monday.

The chart

I’m not sure how China is not going to run into a $ funding issue with her global trade collapsing on the virus. The RMB is going to have to move when China reopens to reflect the risk. A sharply falling RMB is exactly what the FX markets are not prepared for, with record low vol pic.twitter.com/Dq6upgRPs1

— Raoul Pal (@RaoulGMI) January 28, 2020

The buzz

Earnings are rolling in from conglomerates 3M












MMM, -4.48%










 and United Technologies












UTX, +0.50%,










printer maker Xerox












XRX, +4.95%,










pharmaceutical company Pfizer












PFE, -2.88%,










motorcycle maker Harley-Davidson












HOG, -2.76%,










and aerospace group Lockheed












LMT, +0.13%.










German software group SAP












SAP, -3.56%










 raised its forecast.

Alongside Apple and AMD, online auctioneer eBay












EBAY, +0.71%










 and coffee giant Starbucks












SBUX, -0.42%










will report later.

The iPhone maker wants its suppliers to boost production by over 10% from last year, but some have responded that the coronavirus outbreak may make that tough, the Nikkei Asian Review said. Apple declined to comment.

The economy

Durable goods orders jumped 2.4% in December. Case-Shiller home prices and consumer confidence is still to come.

The tweet

Masks are in short supply across China due to severity of epidemic. A video circulated in internet in China conveys black humor. Mahjong is popular in China, often involving small sum of gambling. But for these people, bets are masks. pic.twitter.com/lmTcizl9za

— Hu Xijin 胡锡进 (@HuXijin_GT) January 28, 2020

Random reads

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Nike moves to stop resellers profiting from death of pro basketball star Kobe Bryant

Men are not better than women at reading maps or parking cars, say scientists.

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