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Stocks to Benefit From Small-Business Revival

By David Sterman

NEW YORK ( TheStreet) -- Voters from the left to the right can agree on at least one thing: The long-term health of the U.S. economy depends on jobs being created by the private sector. So last Friday's report that 64,000 private sector jobs were created is a hopeful sign, though clearly not enough.

The chart below shows the depth of pain being experienced by small businesses.

But even as the jobs report may not yet signal a big upturn in hiring, a few other items in the news suggest that the private sector may create higher amounts of new jobs in the months ahead.

First, the Treasury Department has just announced plans to provide states with $1.5 billion to help promote small business job creation. States have to prove that the funds are being matched with much higher levels of bank lending, so the whole economic boost is hoped to be closer to $15 billion. And just last week, the Small Business Jobs Act went into effect, creating a $30 billion small business lending fund for community banks and offering tax cuts for small businesses.

Those efforts may help a trend that is already under way, if little-known ScanSource (SCSC - Get Report) is any indication. This company sells a range of telephone, barcode scanning and point-of-sale equipment to small and medium-sized businesses. Large companies buy these wares direct from the manufacturer. Thousands of smaller companies need to go through middlemen like ScanSource. At the end of every quarter, the company discusses recent sales trends, and right now, business is doing quite well.

Sales in the fiscal first quarter rose to around $625 million from $488 million a year earlier, well ahead of the $567 million consensus forecast. That's pushing shares up close to a 52-week high. But it's a clear sign that other companies selling into the small and mid-sized business (SMB) sector have increasing reasons to cheer. Here are three names I like as SMB plays:

Office Depot (ODP - Get Report): The tough economic environment has been brutal for this office supply chain. Adding insult, rival Staples (SPLS - Get Report) has been a far more nimble player, stealing away market share. Office Depot's stock has fallen from $35 in 2006 to a recent $4.50, but as I noted recently, that seems like too deep of a punishment. (Read Insiders are Scooping up These 3 Retail Stocks.)

Make no mistake, Office Depot has its work cut out for it. The retailer needs to further pare debt, figure out a way to retake market share, even as firms like Wal-Mart (WMT - Get Report) step on to its turf, and weather the effects of the downbeat economies in Florida and California, where the store base is heavily concentrated. But I'm heartened by recent insider buying, improving working capital metrics, very cheap valuations and, as noted above, a possible strengthening in the SMB sector.
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MITL $6.45 -1.80%
ODP $4.92 -0.71%
SPLS $8.40 -1.80%
SCSC $31.30 2.30%
WMT $65.82 -1.60%


Chart of I:DJI
DOW 16,014.38 -12.67 -0.08%
S&P 500 1,852.21 -1.23 -0.07%
NASDAQ 4,268.7630 -14.99 -0.35%

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