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7 Smaller-Company Stocks to Withstand a Possible Correction

NEW YORK (TheStreet) -- Analysts expect a stock-market correction of as much as 5%. While that's possible, I remain constructive on the global economic recovery.

The first place I'd focus on is the U.S., as I believe underlying gross domestic product growth is running at 2%, and that the Federal Reserve's actions have led to a slow recovery. Housing is on the mend; banks are starting to lend again, and they have stronger capital positions; manufacturing is improving; and the consumer remains resilient.

That ties back to the wealth effect amid improving home prices and a better-trending job market, per the February jobs report and a number of sub-components within it -- plus sequentially higher temporary workers and hourly earnings. The four-week moving average of the weekly initial claims is now at cycle lows, and while the 7.7% unemployment rate needs to continue to improve, it was the best in four years.

Away from this, U.S. corporate balance sheets are strong, with $3.7 trillion in cash, and they are starting to use this for dividends, stock buybacks and a threefold year-over-year jump in mergers and acquisitions so far this year. Fourth-quarter earnings and revenue beat expectations, on average, and I expect this will continue to improve. After cutting costs and restructuring their businesses over the past four years, U.S. corporations are now more competitive, so margins can stay strong, even if they've potentially peaked.

I believe many global economies will post better growth this year, and if they do, revenue growth might continue to provide upside. Fund flows have been strong this year as well, with a 10% rise in January and a 4.1% gain in the past four weeks.

All is certainly not perfect, and several headwinds lie ahead: sequestration, the debt ceiling, questions about quantitative easing and monetary policy, Europe and leadership changes in Japan and China. But I believe the U.S. is on better economic footing to handle these issues. From a bottom-up basis, I can still find plenty of attractive stocks.

For the most part, we at Action Alerts PLUS own large-cap, blue-chip stocks. However, I've identified a few smaller-cap stocks that are interesting at current levels.

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