Need to Know: The ‘emerging’ U.S. 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 4,000.

Earnings from Apple AAPL, -2.94% and chip maker AMD AMD, -2.16%, 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, -2.33%, 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, -3.51%, 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, -2.38%. Shares are up 20% in 12 months.

MasTec MTZ, -1.82%, 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

Dow YM00, +0.51%, S&P ES00, +0.65% and Nasdaq NQ00, +0.89%  futures point to a comeback attempt after Monday’s rout. European stocks SXXP, +0.38% 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
The buzz

Earnings are rolling in from conglomerates 3M MMM, -1.41%  and United Technologies UTX, -1.41%, printer maker Xerox XRX, -1.32%, pharmaceutical company Pfizer PFE, +0.85%, motorcycle maker Harley-Davidson HOG, -1.11%, and aerospace group Lockheed LMT, -0.03%. German software group SAP SAP, -2.02%  raised its forecast.

Alongside Apple and AMD, online auctioneer eBay EBAY, +0.34%  and coffee giant Starbucks SBUX, -3.59% 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 are coming early, followed by Case-Shiller home prices and consumer confidence.

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