Small-cap stocks can be very unpopular when times get tough. It is thought they are less well-equipped than larger, financially-stronger companies to come through at the end of the troubles.
This means a lot of top stocks are unfairly overlooked. There are plenty of top small-cap stocks I think could thrive, even as recessionary threats grow. Here are two I’m thinking of buying right now.
Residential Secure Income REIT
Earnings at Residential Secure Income REIT (LSE: RESI) are likely to remain rock-solid even as the economy sinks. Having a roof over our heads is one of life’s non-negotiable, whatever happens.
Owning property stocks is also a good idea during this period of high inflation. This is because the rents they can charge tend to increase along with broader prices.
Rents at Residential Secure Income could also rise spectacularly as homebuyer affordability comes under pressure, boosting demand for rental properties even further. Data from estate agent Hamptons shows that recent interest rate rises mean renting a property is now cheaper than buying. That’s despite average rents in the UK continuing to rise at double-digit percentages.
Hamptons estimates that each further 0.25% rise in the base rate will increase the cost of buying over renting by £41 a month too. Projections are based on a typical first-time buyer with a 10% deposit, it says.
Commercial landlords like Residential Secure Income are always vulnerable to possible changes in industry regulations. Profits could be hit if, say, new regulations drive up the cost of property maintenance.
However, it’s my opinion that the safe-haven qualities of this particular stock outweigh the risks of tighter regulations. I’d also buy it because of its chunky 5% dividend yield.
Begbies Traynor Group
Worsening economic conditions also make Begbies Traynor Group (LSE: BEG) an attractive stock to buy today.
Tragically, the number of businesses experiencing significant financial distress increases when times get tough. Latest data from accounting firm Mazars shows the number of corporate insolvencies rose by almost a third in the last three months, to around 6,000.
The rate at which companies are hitting the wall is accelerating sharply too. Mazars says that 1,817 filed for insolvency in May. This was up 79% year-on-year.
I expect trading at companies like Begbies Traynor to improve considerably as inflationary pressures rise. This particular small-cap is an insolvency practitioner and provider of other services to distressed companies.
Demand for its expertise is already soaring, boosted by the contribution of ongoing acquisition activity. Latest financials showed adjusted pre-tax profits up around 55% in the 12 months to April.
Of course, revenues at Begbies Traynor could dry up when economic conditions improve. But in these uncertain times I still think buying this safe-haven stock is a good idea to help protect my portfolio.
