Can the Small Cap Rally Last?

Earn While You Learn! ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ [EARN WHILE YOU LEARN! JOIN OUR FREE LIVE TRADING SESSION!]( Hello investor, Can the Small Cap Rally Last? As soon as Wall Street became more convinced than ever that the Federal Reserve would start cutting interest rates in September, the stock market had been a loser. Investors flocked to Big Tech companies during the rate-hiking cycle because their robust earnings growth and strong balance sheets were considered a safe place to park money. Now with rate cuts coming, investors moved some money to non-tech sectors that are poised to benefit from lower interest rates. Analysts were glad to see that other sectors started to catch up. It is necessary because Big Tech companies are projected to see their growth rates slow down in the current quarter. So, other sectors need to pick up the slack to keep the rally going. At the same time, investors are starting to worry about the health of the economy. Initial applications for US unemployment benefits jumped last week by the most since early May. Continuing claims also rose. In the graphic below, you can see how initial jobless claims have been rising steadily since January 2024: (Source: Bloomberg) - “The rather smooth climb of continuing claims and the upward trend in initial claims indicate the labor market is cooling. We expect the unemployment rate to climb throughout the second half of 2024, ultimately ending the year at 4.5%,” said Bloomberg economist Stuart Paul. There are some clues that investors are starting to price in a potential economic slowdown. For example, Netflix reported a strong quarter yesterday. It beat expectations for the subscription growth and top/bottom lines. The stock, however, fell more than 3% in extended trading because its third-quarter revenue guidance fell short of Wall Street estimates. - “I do remain concerned about economic growth,” he said. “While the market is convinced lower rates will prevent a slowdown, corporate earnings and Fed commentary continue to imply investors are too complacent when it comes to slowdown risks,” said Tom Essaye at the Sevens Report. What’s more, Liz Young Thomas at SoFi warned that even the recent rally in small-cap stocks may lose its steam if Wall Street becomes more convinced that an economic slowdown is coming. - “As the Fed embarks on a rate cutting cycle, markets tend to cheer it initially and even for a short period after the cuts begin,” said Liz Young Thomas at SoFi. - “But if that cutting cycle occurs in concert with slowing economic data, disappointing earnings, or a quick compression in multiples, small-caps would likely lose steam quickly.” Top “Dividend King” Stock to Buy Right Now Today’s Stock Pick: Illinois Tool Works (ITW) Can you believe that Illinois Tool Works has been in business since 1912? That makes the company 112 years old. ITW stayed in business for more than a century because of its conservative approach to its business strategy. At the same time, it is one of the most innovative companies. (Yes, seriously.) ITW has ~19,600 granted and pending patent applications worldwide, and it is often ranked in the top 100 of patent issuers in the U.S. For example, it holds a patent for Backer-On® - Cement Board Screws (Source: Illinois Tool Works) It operates in seven segments where it manufactures products for wide-ranging industries, such as dishwashers, ovens and refrigerators in restaurants and hotels and automobile components. This is the reason why you don’t really hear about ITW. Most of their products exist within larger products. In other words, it is a “role player” in larger systems. Automotive OEM made up the largest segment in 2023, but only by a little. ITW is well-diversified across seven segments. (A classic trait of a long-lasting business.) The smallest segment had 10% of total revenues. (Source: ITW) And you know what? ITW boasts a 25.1% operating margin in 2023! It is a classic trait of a strong company with in-demand products. High margins allowed them to invest in R&D and develop high-quality products. As a bonus, management expects the operating margin to jump to 26% to 27% this year and grow to 30% by 2030. A dividend king: You can count on ITW to grow dividends over the years. It recently raised dividends for the 60th consecutive year, and it increased 7% per share. That’s a big increase, right? All in all, it returned $3.1 billion of surplus capital to shareholders through dividends and share repurchases last year. It was about 4% of its $75 billion market cap. That’s a solid number. Why? The company expects to grow its EPS by 6% to 10% this year. If you add it to the 4% return from surplus capital, an investor can expect to enjoy 10% to 15% annual returns. For example, ITW reduced its shares outstanding by 7.8% in the past five years. It boosted EPS by 36.1% even though net income rose by 24.2% in the same period. (Source: ITW) By the way, did you catch the final line in the graphic above? ITW boasts a whopping 30.4% after-tax ROIC. It is an astonishing number. An investor will get $1.30 back for every $1 invested in the business. Because of its high-return nature, it is sure to compound gains over the years through dividend growth and share buybacks. Bottom line: The stock is currently yielding about 2.2% in dividends. If you buy and hold this stock for years, that yield will continue to rise due to ITW’s long track record of increasing dividends. Through dividends, share buybacks, and earnings growth, ITW is a good, conservative stock to own.   [EARN WHILE YOU LEARN! JOIN OUR FREE LIVE TRADING SESSION!](     © All Rights Reserved, Trade Alliance [Unsubscribe]( | [Manage Preferences](