After years of volatility, investors are embracing small-cap companies leading to a strong surge in Russell 2000 stocks in the last month.
It’s been a go big or go home mentality in the stock market this year with tech giants like Nvidia (NASDAQ:NVDA) and Amazon (NASDAQ:AMZN) driving much of the gains. However, there’s been a recent shift in gears as investors turn to small-cap companies for returns.
The Russell 2000 ETF which tracks the Russell 2000 Index (an index for small-cap stocks) surged 12% in the last month. According to experts, the gains were driven by expectations of interest rate cuts, an improving inflationary environment, and the valuations of large-cap stocks.
But how high can the Russell 2000 go? Well while the index is still down 8% from its 2021 highs, many believe the rally will be sustained. Fundstrat’s Tom Lee believes the index could go as high as 40% by the end of the summer. DataTrek says investor sentiment gives the index more room to run.
Given the glowing optimism, Russell 2000 stocks stand out as top buys in the market right now. Here’s a look at three companies to add to your portfolio.
Abercrombie and Fitch (ANF)
Everyone likes a good comeback story and that’s exactly what Abercrombie and Fitch (NYSE:ANF) stock offers. The 90s fashion brand has seen a reversal in fortunes fueled by a strategic rebranding to make the brand more inclusive.
A&F shed its preppy image to opt for a quality-focus label that caters to a wider range of preferences and body types. This was accompanied by a rise in efficiency that helped the company reclaim its position in the fashion industry.
The success of its efforts was evident in its last earnings report. The company reported net income of $113.9 million for the period, nearly seven times higher than a year ago. Revenue came in at $1.02 billion over the estimated $963 million while sales grew 22% YoY. A&F attributes this growth to better inventory control, marketing efforts, and agile chase capabilities. For the full year, it expects sales to rise by 10%.
ANF stock is up 66% this year and the company shows no signs of slowing down. Its rosy outlook and successful rebranding efforts make this stock a worthy investment. A&F is also a part of the Russell 2000 stocks and could see a boost from a decline in interest rates.
Duolingo (DUOL)
E-learning has always remained a high-growth industry and Duolingo (NASDAQ:DUOL) dominates the market for learning languages online. The company’s freemium platform has amassed a loyal following of 97 million monthly active users. This includes 7.4 million paying subscribers. This resulted in impressive gains for the company in the last quarter.
Net income for the period grew to $27 million, a significant incline from the $2.6 million loss a year ago. Revenue and bookings grew 45% and 41% respectively. For the upcoming quarter, Duolingo provided optimistic guidance and anticipates a 39% growth in revenue YoY in the $175 million to $177.5 million range
The growth will be fueled by several key factors. This includes an expansion into new verticals such as physics and math to widen its competitive moat. Along with a deeper monetization of its free users through in-app purchases. Duolingo’s total user base represents just a fraction of its target market, giving the e-learning platform plenty of room to grow in the long haul.
DUOL 20% this year presents a great buying opportunity ahead of the anticipated rally in Russell 2000 stocks.
Sprouts Farmers Market (SFM)
The rise in demand for healthy food served as a boon for Sprouts Farmers Market (NASDAQ:SFM). The health-focused grocery chain experienced strong growth in rising demand for its highly differentiated products. It hits the sweet spot for healthy groceries with its high-quality products at competitive prices. This translated to exceptional earnings in its second quarter as it breezed past analyst expectations.
The company saw a 6.7% uptick in comparable sales growth and earnings of 91 cents per share over the estimated 78 cents. Quarterly sales also grew to $1.89 billion surpassing an estimate of $1.83 billion. An additional five locations were opened during the period bringing the total store count to 419. Looking to Q3, Sprouts anticipates earnings between $0.71 and $0.75 per share. Full-year net sales are expected to grow by 9% to 10%.
According to its CEO, the growth was the result of its assortment of health products and unique in-store experience. Grocery chains remain one of the least penetrated categories in e-commerce so a great in-store experience is key to driving gains. This is something Sprouts has mastered.
Looking at the big picture, Sprouts’ strong financials and growth prospects signal plenty of upside in the long haul. This is one of the top Russell 2000 stocks to get behind this summer for lucrative returns.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
