Small-caps are having a rough year. Just take a look at the Russell 2000 stocks. The small-cap index is down nearly 10% since last November. By comparison, large caps within the S&P 500 are up about 10% over the same period.
However, the relative underperformance is perfect for buy-and-hold investors with plenty of time to invest and let assets grow. It’s well-established that small caps outperform large caps over a sufficiently long period. The trap investors fall into when keeping that truism in mind is picking small-cap meme stocks rather than finding hidden gems. Considering the asset class’s recent poor performance, finding undervalued Russell 2000 stocks isn’t too difficult.
As with any long-term investment, look for key factors when finding undervalued Russell 2000 stocks. First, of course, is the financial stability to weather short-term volatility. The good news on this front is that if a company has succeeded thus far in the new higher-rate regime, chances are good they have the financial chops to continue. Second, look to companies with long-term prospects, whether through evergreen products with steady demand or those capturing future market trends that will materialize over the next 5 to 10 years.
Perimeter Solutions (PRM)
Perimeter Solutions (NYSE:PRM) is an undervalued Russell 2000 stock with long-term viability based purely on (effectively) permanent demand. The company makes firefighting equipment emphasizing chemicals needed to suppress and put out fires. To that end, the company’s growth since 2010 is remarkable. In August, the company reported a 7.2% CAGR and projected the company would hit $100.2 billion by 2027 from $70.8 billion in 2022. That growth is based on steady demand for firefighting equipment and built on a foundation of customer loyalty, with many of their largest clients having been part of PRM’s ecosystem for 30+ years.
Perimeter’s stated goal is to “deliver private equity-like returns with the liquidity of a public market.” PRM accomplishes that goal on both fronts, making it an ideal value play for Russell 2000 investors. PRM’s price-to-book ratio is a shockingly low 0.42, and its daily volume averages 1.3 million shares. There’s plenty of upside to the stock, offering a robust 16% total yield today.
Avantax (AVTA)
Avantax (NASDAQ:AVTA) is on the cutting edge of another evergreen industry: tax planning and wealth management. The company ranks within the top 10 of independent broker-dealers and manages more than $80 billion for clients nationwide. Importantly, Avantax is one of the few wealth management firms that puts intelligent tax management at the forefront of its strategies. Tax law and nuance are increasingly complicated, and Avantax brings tools and strategies usually reserved for the wealthiest clients to a middle-market audience.
The company outperformed the Russell 2000 index this year, returning 7.8% since last November. But, despite the outperformance, shares remain undervalued. The company’s 3-year annualized income growth hit a whopping 105% increase this year, indicating ongoing demand for its services alongside well-managed adaptation to current economic conditions.
Last week, its earnings reinforced its short-term sustainability. Revenue increased 16.5% year-over-year, bringing in an additional $563.7 million in new client assets over the quarter. Since tax-focused companies tend to be somewhat cyclical, performance over the previous quarter bodes well for the coming months as more Americans begin looking forward to their 2023 tax bill.
Livent (LTHM)
Livent (NYSE:LTHM) is an undervalued Russell 2000 stock set to capture continued upside from sustainability goals and electric vehicle (EV) popularity. LTHM provides the raw material, lithium, needed for EV battery production alongside a range of other low-carbon transition products.
Livent’s share price is largely tied to lithium’s price. Recent price declines (due to oversupply in some sectors) pushed shares down nearly 25% since January. However, global lithium producers expect that trend to flip in the coming years. One report indicates that demand will beat supply by more than 500,000 tons by 2030, largely due to growing EV adoption trends.
Morningstar expects lithium spot prices to realign into 2024 before rising rapidly. Analysts at the research firm expect lithium’s per-ton price to grow 30% by then, mostly caused by a cyclical shift back to undersupply and overdemand. Likewise, shares trade nearly 70% below Morningstar’s fair value assessment, indicating a massive upside for this undervalued Russell 2000 stock.
On the date of publication, Jeremy Flint held no positions (directly or indirectly) in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
