Small-cap stocks are hurt more by high interest rates than their larger peers. Without the same access to capital, they are forced to borrow money at higher rates. The Federal Reserve’s higher-for-longer policies have weighed heavily on the Russell 2000 small-cap index. It is up only 11% over the past year compared to a 25% gain by the S&P 500. However, that dip could be highlighting a buying opportunity among Russell 2000 stocks for long-term growth.
Not all small-cap stocks are impacted the same. Some enjoy company or industry dynamics that push their shares higher regardless while offering significant drivers for expansion. The following companies to buy are all Russell 2000 stocks for long-term growth potential. Let’s dig into their unique situations that position them for outperformance.
Benchmark Electronics (BHE)
With everyone focusing on the headline names in semiconductors for investment ideas, it allows smaller, less prominent companies to fly under the radar. That provides an excellent opportunity for savvy investors to swoop in before anyone notices. Benchmark Electronics (NYSE:BHE) is a hidden Russell 2000 stock that offers significant long-term growth from the AI phenomenon.
A design and manufacturing services firm to a diverse customer base across semiconductors, aerospace, medical and other industries, Benchmark Electronics is witnessing tremendous growth across all segments. In particular, semiconductor capital equipment — its largest segment — surged 25% to $166 million. It helped BHE produce its fourth consecutive quarter of positive cash flow from operations and free cash flow (FCF).
The stock is up 42% in 2024 and is 58% higher over the past 12 months. It trades at just a fraction of its sales and a rock bottom 9 times FCF. With Wall Street forecasting earnings to grow 22% a year for the next five years, Benchmark Electronics is a Russell 2000 stock for long-term growth to buy now.
Vista Outdoor (VSTO)
Outdoor lifestyle stock Vista Outdoor (NYSE:VSTO) is in the middle of a bidding war. Either the company will be sold as a whole or its shooting sports division will be calved off. With Vista favoring the latter option, it represents a unique opportunity.
The company sells outdoors equipment like camping, fishing and hunting gear. It also has an important shooting sports unit that owns some of the top ammunition brands on the market including Federal and Remington. Vista’s original plan was to spinoff the shooting sports business into a new company called The Kinetic Group while Vista Outdoor would be rebranded as Revelyst and focused on outdoor equipment.
However, it received an offer from Prague-based Czechoslovak Group to buy Kinetic for $1.9 billion. It subsequently received a counter offer from MNC Capital Partners to buy the whole company for $37.50 per share which Vista rejected as undervaluing the business. MNC returned with an improved offer of $39.50 a share, or $3 billion, that it said wouldn’t face foreign investment scrutiny but Vista rejected that as well.
Czechoslovak Group then raised its bid for Kinetic to $2 billion and now MNC has returned with a final offer of $42 per share or $3.2 billion. The improved bid represents a 25% premium to Vista’s closing price on Monday. Vista agreed to accept Czechoslovakia’s improvements on Monday and on Tuesday the Committee on Foreign Investment in the United States cleared the transaction.
Depending on which way the sale goes, Vista Outdoor (Revelyst) could be an attractive business for long-term growth.
Cactus (WHD)
Oil field services firm Cactus (NYSE:WHD) is a play on the long tail opportunity in fossil fuels. Although renewable energy sources are slowly capturing a greater share of energy demand, there is not enough capacity to meet global needs. As we’ve seen with electric vehicles, consumers prefer the reliability and availability of oil and natural gas.
Cactus sells pressure control equipment for wellheads as well as spoolable pipe and fittings, or flexible pipe for winding onto a spool. First-quarter revenue jumped 20% from the year-ago period to $274 million while operating profits surged 26% to $62.6 million. Adjusted earnings per share of 75 cents were 17% higher year-over-year.
Geopolitical concerns are weighing on Cactus’ outlook as it offered cautious guidance for the second quarter but the stock is up 14% so far this year and is 33% higher from where it stood 12 months ago. Shares trade for 15 times next year’s earnings and a bargain-basement 10x FCF. With long-term earnings expansion expected to more than double over the next five years, Cactus is a Russell 2000 stock to buy for long-term growth.
On the date of publication, Rich Duprey held a LONG position in VSTO stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
