2024 might be the year for Russell 2000 stocks. 2023 marked solid returns as the index posted a 15% jump since January but paled in comparison to the S&P 500’s 25% gain. But the winds might be shifting to favor small-caps, setting stocks within the Russell 2000 up for a record run.
Investors seem increasingly concerned that, when investing in a large-cap index like the S&P 500, they’re overexposed to a handful of high-flying stocks that skew total returns. That seems to be the case as the “Magnificent 7” stocks comprise nearly 30% of the overall index and (until just a few weeks ago) were responsible for most of its gains compared to the fairly flat 493 straggling stocks. While the rest of the index catches up, investors still overexpose themselves to company and sector-specific risk as they hold highly concentrated tech positions in Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA), and the other four top S&P 500 stocks.
At the same time, hints of rate cuts (or at least a lengthy pause) bode well for small-caps hungry for capital to fuel growth. Prohibitive debt costs slowed small-cap borrowing and investor capital not allocated to mega-caps largely sat on the sidelines in money market funds. Though investors are cycling back into stocks, nearly $6 trillion is still generating interest in these funds. These factors created a vicious cycle for small-caps as they couldn’t garner sufficient investor interest compared to an appealing 5% fixed-income yield.
But that’s all changing, and these seven small-cap Russell 2000 stocks stand to gain the most.
Duolingo (DUOL)
Duolingo (NASDAQ:DUOL) is an overlooked but red-hot small-cap Russell 2000 stock. Shares more than doubled this year, returning 240% since January. Duolingo’s core offering, mobile language learning apps, might not seem the most viable commercial product from a profit perspective. So why is Duolingo so hot?
In a nutshell, customers love it. Multiple factors could explain its popularity. Variables include an increasingly phone-tethered population, the realization that self-guided learning is a viable model, its gamification, or post-pandemic inertia.
At any rate, Duolingo’s subscription rate soared 54% year-over-year (YoY) in its most recent earnings report, posting $121.3 million for the quarter. Paid subscriber rates jumped to 5.8 million, a 60% YoY gain for Duolingo. On the heels of its success, Duolingo announced a new series of course initiatives beyond language learning, including music and math lessons.
From a practical perspective, Duolingo is overvalued despite its success. But investors said the same about Nvidia for the past few years. And with basically zero competitors as well-positioned as it is, Duolingo’s dominant reign could continue through 2024.
Russell 2000 Stocks: UFP Industries (UFPI)
UFP Industries (NASDAQ:UFPI) is a lumber supply company supporting housing manufacturers. This Russell 2000 stock stands to gain from real estate trends coalescing in time for 2024.
After a stark slump throughout 2022 and most of 2023, new housing starts ticked up sharply in November. These stats indicate renewed enthusiasm for new builds in a (still) hot real estate market. Though existing home prices stagnated and fell, developers identified an opportunity to snag middle-market homebuyers. They began offering new homes priced below wider market estimates and attractive financing deals to subvert high mortgage rates.
This push to strike while the iron’s hot supports UFPI’s lumber supply operation. At the same time, the company’s solid fundamentals set it apart from competitors. The company’s price-to-sales ratio sits at an even 1, indicating investor enthusiasm isn’t pushing the price past practical revenue targets. The company’s cash flow is phenomenal, posting $819 million in free cash flow over the past 12 months. UFPI is also basically debt-free with a healthy cash and net asset balance. These fundamentals set the company up to capitalize on changing trends while providing a cushion to protect against economic downturns or industry supply chain shocks as we saw throughout the pandemic.
Ensign Group (ENSG)
Ensign Group (NASDAQ:ENSG) is a healthcare stock mostly targeting an aging population through assisted living and at-home care offerings. This becomes the crux of a very important point. The U.S. population is aging, and companies like Ensign Group will become a fixture of our national elder care plan. Institutional investing giant BlackRock (NYSE:BLK) marks an aging population as one of the biggest economic trends moving forward, calling it one of the three top trends to watch in 2024.
Ensign is positioned to capitalize on the trend with a rapidly growing footprint. After a better-than-expected earnings report that included a 12% YoY earnings increase, Ensign Group announced a new expansion plan that included six new operations and four real estate assets. Ensign already has 13 physical locations and more than 300 affiliates, so continued growth in light of its maturity points to long-term possibilities for the Russell 2000 stock.
Russell 2000 Stocks: Livent Corp (LTHM)
Livent Corp (NYSE:LTHM) took a beating compared to other Russell 2000 stocks this year, falling nearly 10% since January, although recent weeks mark a modest uptick. Most of LTHM’s return troubles originate from how closely its share price tracks lithium’s spot price. Throughout the year, we saw a post-pandemic bullwhip effect as past supply shortages led to overproduction and, in turn, created supply overages. Oversupply forced lithium pricing down, particularly as demand slowed slightly. In effect, these factors created a perfect storm to suppress LTHM’s share price.
But a rebound could be on the horizon for investors willing to buy today and wait for gains tomorrow. Electric vehicle adoption and sustainable power solutions, of which lithium is a core component, will drive lithium demand to 500,000 tons globally by 2030. Likewise, analysts at Morningstar project lithium pricing to stabilize in 2024 before going stratospheric as the balance skews back towards undersupply. If you hold these theses as factual, then LTHM’s per-share pricing makes it one of the most undervalued Russell 2000 stocks to watch in 2024.
Perimeter Solutions (PRM)
Ready to get excited about firefighting chemicals? While it might not be as hot a topic as AI or EVs, there’s a permanent and near-endless demand for fire suppression equipment. Perimeter Solutions (NYSE:PRM) is one of the few Russell 2000 stocks positioned to capture a permanent, overlooked market.
The company’s growth over the past decade is astounding, with a 7.2% CAGR since 2010 and projecting $100.2 billion in revenue by 2027. This stock is a steal considering this year’s performance, which saw the small-cap stock drop 50% into penny stock territory. The company trades well below book value at just 0.6x, a longstanding indicator of material undervaluation. The company is consistently profitable, posting $0.29 per share in the past quarter, but still trades as though it’s a fresh upstart with questionable potential.
PRM might be the best value play among Russell 2000 stocks today, considering it also offers an 11% total yield via buybacks – helping investors grow their holdings as the company targets new heights.
Russell 2000 Stocks: Firstcash Holdings (FCFS)
Firstcash Holdings (NASDAQ:FCFS) capitalizes on a shrinking economy by offering pawn services nationally and globally. The company posted a solid 25% gain since January. Expect another bump after the holiday season as sales stats come in and consumers offload unwanted gifts for quick cash. FCFS is also unique among typical pawn shops as the company also offers a slew of fintech-style financing and payment options. These products position it as a payment pioneer in a world increasingly eschewing cash transactions.
Despite high investment outflows, FCFS brings in enough money to post consistently high free cash flow stats, marking $407 million total over the past 12 months. Likewise, its growth trajectory is stable if not remarkable, averaging 16% annual revenue growth over the past decade and 12% annual net income expansion over the same period. Between 2022 and 2021, though, net income more than doubled. While that might be due to limited pawn interactions amid the pandemic, smart money points to economic tightening as a cause for the increase. If that thesis bears out, expect to see similar gains for FCFS as we close the year and enter 2024.
Fabrinet (FN)
Fabrinet (NYSE:FN) could be considered an analog of Nvidia among Russell 2000 stocks, considering the company’s AI-centric business model and growth this year (+46% since January). Nvidia is even one of Fabrinet’s core customers, among other tech giants. But where Nvidia is fighting for dominance within the AI equivalent of a gold rush, Fabrinet is selling picks and shovels – meaning it stands to gain no matter which company comes out on top.
Among other products, Fabrinet manufactures and distributes optical cables that push data between hardware platforms at more than 800GB per second. That speed is critical for emerging machine learning and AI advancements, and the segment makes up $500 million worth of Fabrinet’s revenue. But the train hasn’t yet left the station, and some expect the company’s operational income to more than double in the near future.
Despite rapid growth this year, the company seems fairly valued at just 2.64x sales and 24.9x earnings. If economic conditions continue improving apace and tech companies continue mining AI opportunities, Fabrinet could end up one of the best-performing Russell 2000 stocks in 2024.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
