After months of strong gains for leading momentum growth stocks, change might be in the air. Nvidia (NASDAQ:NVDA) shares have pulled back over the past week, and other leading semiconductor and AI stocks are also starting to slow down.
It’s too early to declare that a trend change has occurred definitively. But investors should use this pause in the momentum to consider some smaller-capitalization companies that have been out of favor during the recent tech stock run-up.
The Russell 2000 Index, which consists of a broad selection of smaller firms, is up just 1% year-to-date. And many companies within the index are down sharply this year. All three Russell 2000 stocks to buy on the dip are down at least 20% year-to-date but have surprisingly strong fundamentals. These three Russell 2000 stocks could deliver downright compelling results for the rest of this year.
StoneCo (STNE)
StoneCo (NASDAQ:STNE) is a financial services company focused on payments software. Its proprietary technology facilitates commerce in an omnichannel manner, covering in-store, online and mobile apps. Roughly 3.5 million clients, mostly small — and mid-sized firms — use StoneCo for payment processing and related services.
StoneCo attracted esteemed investors, including Warren Buffett’s Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B), and shares flew higher during the height of the online shopping boom in 2020. That quickly fizzled out, however, and STNE stock has fallen as much as 90% peak-to-trough since then.
While the stock has been terrible for investors who bought near the highs, the underlying business is still humming along—more than that, actually. StoneCo has grown its revenues from $821 million in 2021 to $2.3 billion in 2023. That’s a sizzling upside.
It’s translating to the bottom line as well. Analysts are projecting a 32% increase in StoneCo’s earnings per share this year to $1.28, which puts the stock at less than 10 times forward earnings today. There are the usual risks around FinTech, Brazil and the current high interest rate environment, but that’s all accounted for, and then some in StoneCo’s rock-bottom share price.
Bank of Hawaii (BOH)
The Honolulu-based Bank of Hawaii (NYSE:BOH) is the state’s second-oldest bank. It is also one of the largest banks in the state, and it has incredibly little competition. According to the latest Federal Deposit Insurance Corp. (FDIC) Hawaii report, just seven banking institutions serve the entire state.
Because Hawaii is an isolated and fairly small market, the large mainland U.S. banks have not meaningfully competed in the state. This creates a captive audience for Hawaii’s local banks, allowing them to earn excess profits on the spread between their deposit costs and lending yields.
BOH stock has been one of the rare long-term winners in the U.S. banking industry, with shares rising from $16 in 2000 to a peak of nearly $100 in 2020. That’s not even accounting for the firm’s generous dividend yield, which currently sits at 5.0%.
However, the Bank of Hawaii got caught up in the recent banking tailspin, with shares plummeting to as low as $33 last year. Investors were worried about deposit flight and contagion risk amid the failure of banks such as Silicon Valley.
The catastrophic scenario didn’t play out, and BOH stock has recovered since then. That said, shares have dipped again in 2024, with the stock down 21% year-to-date. The dip creates a second opportunity to buy this geographically-advantaged regional bank at a low valuation and high dividend yield.
Duckhorn Portfolio (NAPA)
Duckhorn Portfolio (NYSE:NAPA) is a pure-play wine company focused on upscale and luxury brands. Duckhorn’s portfolio includes the Decoy, Goldeneye, Duckhorn, Calera and Kosta Browne brands.
NAPA stock has lost more than half its value since its 2021 IPO. The pandemic upended the high-end wine market as many restaurants and other venues suspended operations for an extended period. Long story short, the wine industry is still working through excess inventory and an overplanting of vineyards.
These events have impacted Duckhorn’s profitability, and NAPA stock has suffered the consequences. But in capitalism, the best cure for low prices is low prices. Given industry conditions, marginal wineries will have to reduce competition or shut down production entirely. Meanwhile, the largest players — like Duckhorn — will consolidate their industry position.
That’s precisely what Duckhorn is doing. The company recently bought Jack Daniels’ producer Brown-Forman’s (NYSE:BF-A, BF-B) high-end Sonoma-Cutrer wine business.
This transaction will tremendously enhance Duckhorn’s top- and bottom-line results. It also makes Brown-Forman, one of the alcohol industry’s all-time great performers, a major shareholder in Duckhorn. With NAPA stock down to 13 times forward earnings, shares are a major bargain following this savvy M&A move.
On the date of publication, Ian Bezek held a long position in NAPA, BF-B and STNE stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
