What the New Minimum Wage May Mean for Small-Caps

What the New Minimum Wage May Mean for Small-Caps

Labor is a principal factor of production and as such must be rewarded with fair wages. This is probably why Obama was interested in raising the nation’s minimum wage from $7.25 to $9 as stated in his State of the Union address. What this means for workers, especially the unskilled ones at the lower end of the strata, is an increase in their purchasing power; which can lead to a better standard of living for them.

However, an increase in the minimum wage may mean something entirely different for businesses, especially small-cap businesses. Thus, the proposed new minimum wage has met with some adverse reactions from small businesses. For instance, The National Small Business Association has said that the new minimum wage “could be very problematic for segments of a struggling small-business community.” In addition, the National Retail Federation, through its Senior Vice President for government relations, David French, has said that “A minimum wage hike right now would be one more factor driving up costs for employers and creating headwinds for job creation, especially among the small businesses that create most of our nation’s new jobs.”

Nonetheless, the focus of this article is on how the minimum wage would affect small-cap stocks in the foreseeable future and how you as an investor can navigate the waters safely for your profit. It may interest you to know that increasing the minimum wage would inadvertently increase the operating costs of companies who may or may not be able to pass on the increase in costs to their customers depending on their sector of the economy.

The first emerging growth company to consider is Anaren, Inc. (NASDAQ: ANEN) a provider of micro electronics and microwave components used in wireless, space and defence electronics markets. The company has a market cap of $255.28 million. Anaren currently has a workforce of 862 employees and if its Q4 2012 operating margin of 13.37 percent is anything to go by, an increase in the minimum wage may not have much of an adverse effect on the balance sheet in the coming quarters.

Another small-cap that is worthy of mention as we look into how the new minimum wage may affect businesses, is U.S. Lime & Minerals Inc. (NASDAQ: USLM) a company with a market cap of $269.28 million. USLM manufactures lime and limestone products to be supplied to construction, agriculture, and the oil and gas industries. U.S Lime and Minerals has a total workforce of 301 employees and with the operating margin of Q4 2012 being 17.61 percent, an increase in the wages paid to employees could actually raise operating costs and bring about a reduction in profits.

The third emerging growth company is Flexsteel Industries, Inc. (NASDAQ: FLXS) a manufacturer and importer of residential and commercial upholstered and wooden furniture products. It has a market cap of $162.82 million. Flexsteel has a workforce of about 1300 employees and considering the operating margin of 4.86 percent in Q4 2012, it is doubtful that the company would appreciate on the government’s plan to increase the minimum wage to $9.