The rest of 2024 could be a breakout period for cheap Russell 2000 stocks. Thus far, the index posted a 3.6% gain since January, though it lags the S&P 500’s 10% bump. However, incoming tides might favor small-caps, setting the stage for a record run among cheap Russell 2000 stocks.
Investors are increasingly wary that investing in a large-cap index like the S&P 500 overexposes them to a few high-performing stocks that skew total returns. This concern is valid, as the “Magnificent 7” stocks make up nearly 30% of the overall index and, until recently, accounted for most of its gains compared to the relatively flat performance of the other 493 stocks. While the rest of the index catches up, investors still face company and sector-specific risks by holding concentrated tech positions in Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL), Meta (NASDAQ:META), and the other top S&P 500 stocks.
Meanwhile, potential rate cuts or at least a prolonged pause could benefit small-caps needing growth capital. High debt costs have hindered small-cap borrowing, and investor cash not allocated to mega-caps has largely remained in money market funds. Although investors are gradually returning to stocks, nearly $6 trillion still sits in these funds. This dynamic created a vicious cycle for small-caps, struggling to attract investor interest compared to an attractive 5% (or more) fixed-income yield through money market accounts, high-yield savings, and bond ETFs.
However, this situation is changing, and these seven cheap Russell 2000 stocks stand to benefit the most.
Valley National Bancorp (VLY)
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As Fed rate cuts slowly take effect, banking stocks will move in one of two directions. Companies with limited debt or sufficient size to manage it, such as legacy mega-banks, will likely see their shares decline as net interest income dries up. Conversely, smaller regional banks with higher relative leverage and local real estate lending operations will benefit from lower borrowing rates and increasing consumer loan interest. Among these regional banks, Valley National Bancorp (NASDAQ:VLY) stands out as a particularly cheap Russell 2000 stock.
Valley National’s stock trades at a low 0.6x book value and 8x earnings, making it undervalued and inarguably cheap. Its strong balance sheet and low debt load, reflected in a debt-to-equity ratio of just 0.56 compared to the industry average of 1.2, demonstrate the bank’s lower leverage relative to competitors. The bank’s recent stock buyback initiative and a 5.7% trailing dividend yield further underscore its financial health.
Analysts widely agree that Valley National is undervalued. Consensus estimates assign an average price target of $9.44, about 20% above its current share price. In addition to this bullish outlook, sentiment around the bank’s stock is improving, with around half of analysts now recommending a “hold,” a significant increase from the 50% who advised selling in the previous evaluation period.
Cheap Russell 2000 Stocks: Duolingo (DUOL)
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Duolingo (NASDAQ:DUOL) is a hidden gem in the education tech sector. Despite its shares more than doubling last year, it’s dipped 16% since January and 27% in the past week. However, given its strengths, the current dip presents a buying opportunity. Initially, there were doubts about the commercial viability of its mobile language learning apps. Still, Duolingo is proving its viability as an EdTech stock and a (relatively) cheap Russell 2000 stock contender.
The key to its success lies in its popularity among customers. Several factors contribute to its widespread appeal, including the increasing reliance on smartphones, the effectiveness of self-directed learning, engaging gamification elements, and lingering post-pandemic habits.
Duolingo’s latest earnings report showed a 5447 year-over-year surge in subscription rates, generating $161 million for the quarter. The number of paid subscribers rose to 7.4 million, marking a 54% year-over-year increase. Building on this success, Duolingo recently announced plans to expand its educational offerings to include music and math lessons.
Although some argue that Duolingo’s market valuation is too high, similar criticisms were once directed at Nvidia. With virtually no rivals matching its position, Duolingo is well-positioned to maintain its dominance into 2024 — this cheap Russell 2000 stock won’t remain so for long.
UFP Industries (UFPI)
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UFP Industries (NASDAQ:UFPI) is a lumber supply company that supports housing manufacturers. This cheap Russell 2000 stock stands to benefit from real estate trends rapidly changing as markets reach a “new normal” paradigm of higher-for-longer.
After a significant slump throughout 2022 and most of 2023, new housing starts are stabilizing. This continued expansion indicates renewed enthusiasm for new builds in a still-hot real estate market. Although existing home prices stagnated and fell, developers seized the opportunity to attract middle-market homebuyers by offering new homes priced below market estimates and providing attractive financing deals to counter high mortgage rates.
This strategic move boosts UFP’s lumber supply operation. Additionally, the company’s solid fundamentals distinguish it from competitors. With a price-to-sales ratio of 1, investor enthusiasm is well-aligned with practical revenue targets. UFP’s cash flow is strong, with $788 million in free cash flow over the past 12 months. The company is also virtually debt-free, maintaining a healthy cash and net asset balance. These robust fundamentals position UFP to capitalize on evolving trends while providing a cushion against economic downturns or industry supply chain shocks, even as rate cut prospects remain uncertain.
Cheap Russell 2000 Stocks: Fabrinet (FN)
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Though often overlooked, Fabrinet (NYSE:FN) is becoming a key player among cheap Russell 2000 stocks, riding the artificial intelligence wave but sufficiently differentiated to avoid major competitive action. As a major upstream supplier for leading firms like Nvidia, it provides essential components for modern technology. Fabrinet’s product range is broad, but its fiber optic cable segment is the cheap Russell 2000 stock’s shining star.
The company produces cutting-edge, ultra-high-speed fiber optic cables that enable rapid communication between computers and hardware systems at speeds exceeding 800 GB per second. These cables facilitate swift, large-scale data transfers for AI-focused firms like Nvidia but also serve cloud computing and generalized data storage and management purposes. This segment of Fabrinet’s business currently generates about $500 million in revenue, with projections indicating a potential doubling of operational income in the coming years.
Shares surged recently, hitting a 22% gain since January and 150% over the past year. That momentum seems to be continuing, making it one of the best Russell 2000 stocks poised to capture steady-state AI sector growth.
Lattice Semiconductor Corp (LSCC)
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Lattice Semiconductor (NASDAQ:LSCC) is a prominent semiconductor company focusing on various “big data” computing solutions, including edge and cloud computing. Its core products also span across consumer electronics like televisions and laptops, ensuring its market penetration and staying power. Recent financials indicate strength for this often-overlooked semiconductor company and cheap Russell 2000 stock.
In April’s earnings report, Lattice boosted its financial standing slightly, which “Came in as expected [reflecting] the near-term impact of cyclic industry headwinds,” according to CEO Jim Anderson. Revenue dropped by 20% year-over-year, and the company adapted to cost-cutting initiatives while roughly maintaining its gross margin. Net income dropped, too, though the company still posted an 11-cent EPS. Despite the ambivalent news, shares dipped by about 4%, which seems reasonable considering the headwinds Anderson referenced.
One reason is a slight slowdown in demand. Enthusiasm for general-purpose artificial intelligence seems to have peaked, and consumers are cutting spending. This indicates that firms with an AI advantage have enough computing power to sustain them for the foreseeable future.
Simultaneously, slowing consumer sentiment means Lattice’s peripheral products, like televisions, are not selling as expected. However, apparent shifts in consumer sentiment could reverse this trend. Lattice’s strong financial position allows it to withstand periods of flat sales growth, while its expansive portfolio ensures longevity in a competitive industry.
Cheap Russell 2000 Stocks: Healthpeak Properties (PEAK)
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Unlike many of today’s cheat Russell 2000 stocks, Healthpeak Properties (NYSE:PEAK) thrives in any interest rate environment. Furthermore, the company’s management is at the forefront of emerging healthcare trends, making it an excellent choice for investors seeking flexibility and responsiveness alongside the wider real estate sector’s upside potential.
In response to senior living facilities’ challenges during the pandemic, management decisively sold most of its senior housing assets for about $4 billion in 2020 and 2021. The company then strategically reinvested the proceeds into life science and medical office portfolios, sectors with high-quality assets in leading markets and top-tier tenants, both marking today’s top emerging healthcare segments.
Healthpeak’s strategic repositioning allows it to capitalize on potential regulatory changes in healthcare, especially cost-management initiatives targeting aging populations on fixed incomes. With its high-quality facilities in niche markets, Healthpeak is well-positioned to meet the rising demand from premier healthcare systems, anticipating that those who can afford it will demand a more concierge experience.
FirstCash Holdings (FCFS)
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FirstCash Holdings (NASDAQ:FCFS) thrives in a shrinking economy by offering pawn services nationally and globally. To that end, the company’s stock posted a decent 9% gain year-to-date, widely in line with wider markets. Anticipate another increase as we enter the summer season and consumers sell unwanted spring cleaning items for quick cash. FirstCash stands out among typical pawn shops by also providing a range of fintech-style financing and payment options, positioning itself as a pioneer in a world increasingly moving away from cash transactions.
Despite high investment outflows, FirstCash consistently generates substantial free cash flow, totaling $355 million over the past 12 months. Its growth trajectory is stable, averaging 25% annual revenue growth and 27% annual net income expansion over the past three years. Between 2021 and 2022, net income more than doubled, and that momentum hasn’t yet abated. While initial gains could be partly due to reduced pawn interactions during the pandemic, economic tightening likely contributed to the increase. If this trend continues, the cheap Russell 2000 stock is set for similar gains as we enter 2024’s second half.
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.comPublishing Guidelines.
Jeremy Flint, an MBA graduate and skilled finance writer, excels in content strategy for wealth managers and investment funds. Passionate about simplifying complex market concepts, he focuses on fixed-income investing, alternative investments, economic analysis, and the oil, gas, and utilities sectors. Jeremy’s work can also be found at www.jeremyflint.work.
