TD Cowen Best Ideas – Smidcap Sweethearts 2025

Overview:

We are pleased to once again present the TD Cowen Smidcap Sweethearts, an annual compilation of our analysts’ top investment recommendations below US$10 billion in market capitalization. This year's edition includes analyses of nearly 70 stocks as well as perspective from our Washington Research Group.

Amidst a downtrend of sell-side smidcap stock coverage, Smidcap Sweethearts is a reflection of our goal to not only provide unique perspective, but also to showcase investment ideas often overlooked in the marketplace.

U.S. Macro Outlook: Cloudy With a Chance of Rate Cuts

It's safe to say that so far this year, the U.S. economy has managed to dodge some of its biggest downside risks, with growth holding up relatively well and inflation cooling. Trade policy shocks and fiscal uncertainty have been dominant themes for 2025, while markets have tried to navigate other geopolitical headlines. But as we detail in our full report linked below, while policies have yet to materially translate into growth and inflation figures, sentiment has been depressed in recent months, including at small and medium-sized businesses. Reflecting higher policy uncertainty, economist forecasts have been revised materially, with year-ahead consensus expectations now looking for higher inflation and weaker growth than at the start of the year. This "stagflationary" impulse underscores the challenges faced by firms across the U.S. economy.

Year-Ahead U.S. Consensus Expectations

In this U.S. macro overview, we take a look at how small and medium-sized firms have been performing so far this year, before turning to some key underlying assumptions going forward, and how these shape the U.S. economy going forward. Ultimately, we expect the weaker sentiment seen so far to eventually pass through to the hard data. While we view the odds of a U.S. recession this year at around only one third, we expect GDP growth to slow into the middle of the year, while inflation picks up into H2, reflecting tariffs. The slowdown in growth is likely to lead to a looser labour market and nudge the FOMC into cutting rates later this year: we expect 25bps cuts at both the October and December meetings.

So, How Are Small Businesses Faring?

Small businesses have faced significant headwinds from economic uncertainty in the wake of the administration's tariff policies. The NFIB survey provides a detailed snapshot of small firms' sentiment and economic situation. By this metric, NFIB small business optimism declined to start the year, while uncertainty remains elevated after peaking prior to the election. Through the first half of 2025, labor market conditions have continued to soften while price expectations have started to pick up again, underscoring the stagflationary nature of shocks hitting the U.S. economy.

Small Business Uncertainty Remains Elevated

Prolonged uncertainty can weigh on growth, specifically through dampened investment. Small businesses have noted declining capital expenditure plans since the end of 2024 with inventory expectations also turning lower. Economic concerns appear to be the driver of the growing hesitancy to invest. The percentage of firms responding to NFIB that have said that now is "not a good time to expand due to economic conditions" has been rising since the start of the year. Aggregate surveys across different regions have shown similar sentiment as capital expenditure expectations have declined nationally.

Tariffs have increased the risks to both sides of the Fed's dual mandate. We expect that increased costs and heightened uncertainty will weigh on businesses' bottom lines and eventually lead to further deterioration in the labor market. The NFIB survey shows that this is already starting to happen for one part of the U.S. economy: small businesses have reduced hiring and have fewer job openings. Risks to inflation are also higher; however, small business plans to increase prices are outpacing their plans to increase compensation.

Washington Policy in 2025

As we did last year, we publish this note at a time when we are near the midway point in the year. This note covers the assessment by our policy team on:

Macro Outlook = Taxes & Tariffs

Reconciliation bill likely to pass by late July with seven major provisions:

• Extended expiring TCJA rates
• Corporate provisions (expensing, R&D, etc.)
• International/Retaliatory (Section 899)
• New tax provisions (no tax on tips, etc.)
• Offsets (Medicaid, SNAP, IRA)
• US$300 billion in new spending (defense & deportation)
• US$5 trillion debt limit increase

No less than four separate tariff/trade tracks

• USMCA (Canada/Mexico)
• China
• Section 232/sectoral
• Reciprocal (current July 8 deadline)

Geopolitical Security & Defense.

The revolution in unmanned and robotic warfare has happened. Lethal drones have become a fixture on modern battlefields in Ukraine and the Middle East. Adoption is not in doubt. DoD's newest budget requests significant increases for UAS and c-UAS systems.

Financials/Housing

Headline risk is elevated for the credit bureaus with Congress addressing mortgage trigger leads and FHFA evaluating credit report pricing and how many credit reports are needed for GSE mortgages. To us, the actual threat to the credit bureaus is less than the headlines would suggest.

Health Care

For the first time since the ACA, hospitals are a target for cuts to pay for the GOP "Big Beautiful Bill," but the particulars of how are still up in the air.

Technology, Media & Telecom

We think the FCC will soon begin a full-scale relaxation of its broadcast ownership caps aimed at jump-starting the long- hoped-for TV M&A cycle.

Energy Transition

Load growth, generation development challenges and rising consumer electricity rates point to an increased regulator and utility focus on distribution-level electric metering and networking technology investments