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As investors rotate out of technology stocks, small-cap stocks may be their destination. The sector has lagged far behind its larger peers and offers up undervalued opportunities.
The S&P 500 and the Dow Jones Industrial Average routinely hit new all-time highs. But the Russell 2000 small-cap stock index still sits 8% below its record set three years ago. With the index enjoying a recent five-day rally, now could be the time to buy into the sector.
Small-cap stocks have been pressured due to historically high interest rates. Unable to readily access financing, they languished. Now that inflation is signaling it may finally be tamed, the Federal Reserve could cut interest rates sooner than expected. So that could unleash a wave of growth amongst small-cap stocks. Although it might start off as a trickle, it could turn into a tsunami of opportunity.
Therefore, let’s explore three Russell 2000 stocks you will be glad you caught so you can surf to new highs.
Land’s End (LE)
Land’s End’s (NASDAQ:LE) turnaround is underway. After a rough two years, the apparel retailer is on track to record profits once more. Management expects to generate net income of between $2.5 million to $10 million. That’s a range wide enough to drive one of its delivery trucks through but it depends on just how good business gets. Currently, things are looking great.
Fiscal first-quarter sales dropped 7.8% to $285 million but that was due to a contract with Delta Air Lines (NYSE:DAL) ending, which was expected. Excluding the Delta business, net revenue rose 1% year-over-year (YOY).
Adjusted EBITDA was down 11.6% from last year but excluding Delta again, adjusted profits soared 68%. It is part of the reason why Land’s End was able to more than double its profit guidance at the low end. Previously, it forecasted a base of $1 million in net income for fiscal 2024. On an adjusted basis, though, the retailer guided towards profits of $5.5 million to $13 million.
Thus, Land’s End stock has doubled over the past year, but there is more room for growth. The stock goes for just a fraction of sales and a bargain-basement 5x free cash flow (FCF). Multiple expansion should be in the cards for the year ahead.
Cars.com (CARS)
Automotive marketplace Cars.com (NASDAQ:CARS) is the second small-cap stock to buy this month. Car sales are making a comeback and Cars.com is one of the leading sites for making a deal happen. A break in inflation and interest rates would help its bottom line, too.
Auto sales are up 3% over the first half of the year, but are expected to slow in the back half to end 2024 up a little over 1% higher. Cox Automotive says inventories are rising, dealers are offering more incentives and presidential politics is roiling the economic outlook. All of this is good news for car buyers as vehicles become more affordable.
Also, lower interest rates will reduce the costs of financing a car purchase. Because Cars.com doesn’t own the cars itself but merely serves as the middleman between buyers and sellers, it will benefit from increased activity. First-quarter revenue was up 8% to $180.2 million, with 90% coming from dealer subscriptions. OEM revenue was up 13% YOY as dealer inventories rose so automakers increased their spending to raise awareness.
True, Cars.com stock hasn’t had the big run-up Land’s End did. Its shares are down 7% over the last 12 months. Yet, they have jumped 22% over the past quarter, and there is more gas in its tank. Shares trade at eight times next year’s earnings estimates, less than twice sales and a discounted 9x FCF.
Petco Health & Wellness (WOOF)
When I first identified Petco Health & Wellness (NASDAQ:WOOF) last August, I noted the pet care company was still reeling from the pandemic balloon being popped. Locked down, everyone was buying pets, food and products. The aftermath was a letdown for pet retailers.
I was obviously early in my call that it was a deeply discounted growth stock to buy, as WOOF stock went on to lose almost another 80% of its value afterward. But that is now changing for the penny stock. Petco Health & Wellness stock is up 163% from that low point and will likely keep churning higher. The main case, as I stated last August and again in May almost at its bottom, was the humanization of pets. By treating their four-legged friends as part of the family, pet owners are spending a lot of money on them.
The American Pet Products Association says U.S. pet parents will spend 2.4% more on them this year than last or $150.6 billion. The greatest percentage will be spent on food and treats, or some $64.4 billion, with another $38.3 billion going to veterinarian care and products. This plays right into WOOF’s strengths, making it a stock a buy.
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On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.
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