The market is giving off signs that the appetite for large-cap stocks may be waning. Since the beginning of May, the S&P 500 is up 3.7%. By contrast, the Russell 2000 is up 5.1%. That may not seem like a huge difference, but if you’re looking for stocks that can beat the rate of inflation, it may be time to look for undervalued Russell 2000 stocks.
The Russell 2000 tracks the 2,000 smallest stocks out of the 3,000 stocks in the Russell 3000 index. It’s typically known as the small-cap index because many of the stocks in the index have market caps under $2 billion. Because of their size, these stocks tend to be more volatile. However, they also have large growth potential. In fact, over time, many small-cap stocks will outperform large-cap stocks.
There are several exchange-traded funds (ETFs), such as the iShares Russell 2000 Index ETF (NYSEARCA:IWM), that passively track the performance of the Russell 2000. But if you’re looking for individual stocks that may beat the 3.7% growth of the S&P 500, here are three undervalued Russell 2000 stocks to consider.
Academy Sports & Outdoors (ASO)
If you’re looking for stocks that will beat inflation, Academy Sports & Outdoors (NASDAQ:ASO) may not seem like the best choice at first glance. ASO stock is down about 12% in 2024, but since this article is looking at undervalued Russell 2000 stocks, it’s good to know that analysts believe there is much higher upside for the sporting goods retailer.
The company missed on fourth quarter earnings per share (EPS) by 5 cents. But the $2.23 EPS it reported was higher than the $1.99 EPS it reported in the same quarter for 2023. Still, the company is guiding for growth between –4% and 1%. This reflects the impact of inflation on its core consumer. And the company was not factoring in potential interest rate cuts.
Both are valid concerns. However, the company is pushing forward with plans to open 15 to 17 new stores in 2024. That’s down from its 26 store-per-year forecast by 2027, but it seems reasonable in the current retail environment. Speaking of the current retail environment, Academy Sports & Outdoor, like many retailers, continues to deal with shrink (i.e. retail theft) that is pressuring its operating margins.
With all that to consider, analysts still remain bullish on ASO stock. Fifteen out of 15 analysts give it a Buy or Strong Buy rating, and the $76.64 price target is over 31% higher than its price on May 6, 2024. Plus, you do get a small dividend that has been growing for the last two years.
Crocs (CROX)
Crocs (NASDAQ:CROX) has been one of the best-performing stocks not only in the Russell 2000, but in the entire market. CROX stock is up 50.7% in 2024 and 36.5% in the three months ending May 7, 2024.
The company also smashed earnings on May 7, 2024. The company beat on the top and bottom lines and both numbers were significantly higher year over year. Crocs is still facing softer sales volume for its HeyDude brand, that’s more than offset by its signature clogs, which the company sold in record numbers in the first quarter.
Performance like that may have you believing the stock is fully priced. But that’s not what the numbers say. As I noted in April, Crocs has a forward price-to-earnings (P/E) of around 11x, and it has an enviable 55% gross margin.
And since that article, the consensus price target for CROX stock has continued to move higher. As of May 9, 2024, the price target is $150.27, which gives investors about 7.5% upside. But once analysts weigh in on earnings, the new price target could have substantially more upside.
Ovintiv (OVV)
Ovintiv (NYSE:OVV) is one of several undervalued Russell 2000 stocks in the energy sector. Despite wars on two fronts, and consumers (and governments) that continue to spend, oil prices have found it hard to push past the $82 to $83 level.
But demand for oil and natural gas is still expected to rise. That will only accelerate if the Federal Reserve lowers interest rates at some point in 2024. And Alex Sirois explained the simple case for Ovintiv. That is, the company “invested heavily in production in anticipation of rising prices.”
So far that capital expenditure has worked against the company as production is up while prices are down. But investing is about trying to predict where oil prices will go. And when oil prices go higher, as they are likely to do, Ovintiv will be well-positioned for higher revenue and earnings. That’s particularly true because the company’s operations include assets in the Permian basin.
Analysts agree, and even though OVV stock is up 14.9% in 2024, they still forecast 18.5% upside for the stock. And investors even get a small dividend that currently yields 2.28%.
On the date of publication, Chris Markoch 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.