Despite high interest rates, which hit small-cap stocks harder than their larger brethren, the Russell 2000 index of the market’s smallest companies is making its move. Since the end of April, the small-cap benchmark has kept pace with the S&P 500 and has been ahead till last week’s dip.
Over time, small-cap stocks tend to outperform bigger companies. Including a mix of these upstarts is a good way to juice your portfolio’s performance. Because the Russell 2000 has lagged the index of the 500 largest companies for the past few years, it should be ready to resume its leadership role, the Fed’s higher-for-longer interest rate policies notwithstanding.
Therefore, the following three companies are Russell 2000 stocks to buy now and hold for the long term.
Vista Outdoor (VSTO)
Outdoor equipment and lifestyle leader Vista Outdoor (NYSE:VSTO) is amid an interesting strategic maneuver. It wants to spin off its shooting sports business into a separately traded standalone company called Kinetic Group, but MNC Capital Group wants to buy the whole company. It recently raised its offer to $3 billion or $37.50 per share.
If you’re the gambling kind, you could buy Vista stock (to be renamed Revelyst if the spinoff occurs instead) for the arbitrage play as VSTO trades at $34.90 per share after last Friday’s close. The lower price suggests the market thinks the deal won’t happen.
The spinoff is not a sure thing, either. Last October, Prague-based Czechoslovak Group offered to buy Kinetic for $1.9 billion. The problem is that Vista’s shooting sports business has some of the most important ammunition products with leading brands such as Federal and Remington, and the Committee on Foreign Investment in the United States may not approve the sale to a foreign company. The deal remains under review.
Vista Outdoor (or Revelyst) could be a smart play on the growth in outdoor leisure activities. Even though the stock is up 18% this year, it trades at just eight times trailing earnings, a fraction of its sales, and a bargain-basement five times the free cash flow (FCF) it produces. Whether there is a spinoff, a spinoff buyout or the company as a whole being bought, profit will be made in its stock.
ScanSource (SCSC)
Barcode scanner maker ScanSource (NASDAQ:SCSC) is a surprising high-growth small-cap stock. It sells into a dozen industries, including manufacturing, warehouse and distribution, retail and e-commerce, hospitality, transportation and more. The challenging macroeconomic environment of elevated inflation and high interest rates impacted its end users, who expressed caution over IT spending. So, although management expected a weaker market, it was surprised by the 15% drop in fiscal third-quarter sales.
However, profitability remains strong, with gross margins of 12.6%, higher than management expected. Free cash flow production was also robust.
Management expects business to return to growth because the supply chain disruptions of the past few years are now at different stages for its customers. Normalcy will soon return. The market agrees because after shares initially tumbled following the report, they bounced back and continued their upward trajectory.
ScanSource stock is up 25% in 2024 and is 75% higher over the past year. There is no reason it shouldn’t continue its climb higher.
Rocky Brands (RCKY)
Footwear manufacturer Rocky Brands (NASDAQ:RCKY) owns well-known shoe and boot brands, including its namesake banner Rocky, Georgia Boot, Durango and the Original Muck Boot Company. It sells primarily wholesale through sporting goods stores, outdoor specialty stores, work-related retailers and more. The wholesale channel represents almost 73% of total sales. It also has its retail channel of stores and websites that make up the bulk of the balance.
Yet the challenging retail environment has made it difficult for Rocky Brands, and sales tumbled last year. Business is picking up in 2024, and Rocky plans for future growth. Sales adjusted for the divestiture of its Servus brand rose 7.6%, while profits surged over 76%. It recorded earnings of $0.41 per share compared to $0.12 last year.
The market expects a turnaround, too. Shares are up 19% this year and a remarkable 84% over the past year on its improved outlook. With future store growth, look for Rocky Brands to soar.
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.
