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Small-cap stocks suffer more from high interest rates than their larger competitors. Without the same access to capital, they are forced to borrow money at higher rates. The Federal Reserve’s policy of raising interest rates for extended periods has Russell-2000 Small-cap index. It has risen only 11% in the last year, compared to a 25% increase in the S&P500However, this decline could present a buying opportunity for long-term growth Russell 2000 stocks.
Not all small-cap stocks are affected equally. Some benefit from company or industry momentum that drives their stocks higher regardless while providing significant growth drivers. The following companies to buy are all Russell 2000 stocks with long-term growth potential. Let’s take a closer look at their unique situations that position them for outperformance.
Benchmark Electronics (BHE)
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With everyone focused on semiconductor headlines for investment ideas, smaller, lesser-known companies can go unnoticed, providing a great opportunity for savvy investors to sneak in before anyone notices. Benchmark electronics (NYSE:BHE) is a hidden Russell 2000 stock that promises significant long-term growth from the AI phenomenon.
Benchmark Electronics, a design and manufacturing services company for a diverse customer base in semiconductor, aerospace, medical and other industries, is experiencing tremendous growth across all segments. In particular, semiconductor capital equipment – the largest segment – grew 25% to $166 million. This helped BHE achieve positive cash flow from operations and positive free cash flow (FCF).
The stock is up 42% in 2024 and 58% over the past 12 months. It trades at a fraction of its revenue and a low of 9x FCF. With Wall Street projecting earnings growth of 22% per year for the next five years, Benchmark Electronics is a long-term growth Russell 2000 stock to buy now.
Vista Outdoor (VSTO)
Outdoor lifestyle stock Vista Exterior (NYSE:VSTO) is in the middle of a bidding war. Either the company will be sold as a whole or the shooting sports division will be spun off. Since Vista prefers the second option, this is a once in a lifetime opportunity.
The company sells outdoor gear such as camping, fishing and hunting equipment. It also has a major shooting sports division that owns some of the best ammunition brands on the market, including Federal and Remington. Vista’s original plan was to spin off the shooting sports business into a new company called The Kinetic Group, while Vista Outdoor would be renamed Revelyst and focus on outdoor gear.
However, it received an offer from Prague-based Czechoslovak Group to buy Kinetic for $1.9 billion. The company then received a counter offer from MNC Capital Partner to buy the entire company for $37.50 per share, which Vista rejected on the grounds that it was not worth enough. MNC came back with an improved offer of $39.50 per share, or $3 billion, which it claimed would not be subject to scrutiny by foreign investors, but Vista rejected that offer too.
The Czechoslovak Group then increased its bid for Kinetic to $2 billion, and now MNC has come back with a final offer of $42 per share, or $3.2 billion. The improved bid represents a 25 percent premium to Vista’s closing price on Monday. Vista agreed on Monday to accept Czechoslovakia’s improvements, and on Tuesday the Committee on Foreign Investment in the United States approved the transaction.
Depending on how the sale goes, Vista Outdoor (Revelyst) could be an attractive company for long-term growth.
Cactus (DBH)
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Oilfield service company cactus (NYSE:WHD) is a play on the long-term opportunities in fossil fuels. Although renewable energy sources are slowly meeting a larger share of energy demand, there is not enough capacity to meet global needs. As we have seen with electric vehicles, consumers prefer the reliability and availability of oil and natural gas.
Cactus sells wellhead pressure control equipment and reelable tubing and fittings, or flexible tubing that can be rolled onto a spool. First-quarter revenue rose 20% from the same period last year to $274 million, while operating profit rose 26% to $62.6 million. Adjusted earnings per share of 75 cents were 17% higher year over year.
Geopolitical concerns are weighing on Cactus’s outlook as the company issued cautious guidance for the second quarter. The stock is up 14% so far this year and is 33% higher than 12 months ago. Shares trade at 15 times next year’s earnings and a bargain 10x FCF. With long-term earnings growth 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 shares. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s publishing policies.
