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3 Quality Small Caps Available at a Discount Amid Russell 2000 Correction

Published 03/15/2024, 05:42 AM
  • As the stock market consolidates 2024 gains, small caps have yet to catch up, prompting speculation about potential entry points amid the recent drop.

  • Russell 2000 has posted marginal gains since the year's start, but historically, small caps often lead market rallies.

  • In this piece, we will discuss three small-cap stocks you can add to your portfolio as the Russell 2000 index corrects.

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  • The stock markets kicked off 2024 with robust gains, but one area is trailing behind: small caps. While the S&P 500 surged by about 8%, small-cap stocks have faced several sell-offs, including one witnessed yesterday. Amid the recent correction, investors are already eyeing potential entry points into the small-cap sector.

    The Russell 2000 has only inched up 0.3% since the year began. However, over the past five years, the index has seen a respectable 31.5% increase. Historically, the start of a broad market rally is often led by small-cap stocks.

    But will this pattern repeat in 2024? That hinges on several factors. Firstly, the economy must steer clear of a recession. Additionally, the timing of the US Federal Reserve's interest rate cuts is crucial. Currently, markets anticipate the first rate cut no earlier than June. Many small caps are still focused on growth and would benefit from lower borrowing costs.

    Another key consideration for investors is company valuations. As of March 8, 2024, the price-earnings ratio (P/E ratio) of the Russell 2000 index stands at 27.89. For those eyeing small-cap growth stocks, targeted research is advisable.

    To aid in this search, we've utilized InvestingPro's screener to pinpoint healthy small-cap stocks with growth potential. Three stocks have emerged as standout candidates, meeting both InvestingPro's criteria and receiving positive assessments from Wall Street analysts.

    1. Tactile Systems Technology

    Tactile Systems Technology (NASDAQ:TCMD) has established itself as one of the driving forces in the constant pursuit of innovation and improvement in medical care. Focusing on developing medical devices for treating chronic illnesses, the company has taken a path that is not only economically promising but also has the potential to improve the lives of many people.

    Tactile Systems Technology has particularly specialized in treating vascular diseases such as lymphedema and chronic venous insufficiency. Thanks to its innovative therapy solutions, the company increased its revenue in the fourth quarter of 2023 by 5% compared to the previous year, reaching $77.7 million. Ultimately, the company achieved an adjusted net profit of $8.9 million or $0.37 per share, surpassing market expectations.Revenue and Profits

    Source: InvestingPro

    The revenue growth of Tactile Medical was primarily driven by an increase in sales and rentals of its lymphedema therapy devices, as well as a slight uptick in sales in the respiratory therapy segment. These successes not only demonstrate the effectiveness of the company's products but also its ability to adapt to the market's needs.

    For 2024, Tactile Medical has also provided an optimistic revenue forecast of $300 to $305 million, representing an increase of approximately 10% compared to the previous year. Analysts are also optimistic, predicting another revenue growth of around 13% for 2025.

    Analyst Revenue and EPS Forecasts

    Source: InvestingPro

    Source: InvestingPro

    In addition to promising business prospects, Tactile Systems Technology also stands out for its solid financial position. According to InvestingPro, the company achieves an average overall score of 4 out of 5 points in areas such as cash flow, momentum, profitability, growth, and relative value.

    Financial Health

    Source: InvestingPro

    It's worth noting the high Free Cash Flow yield of 8.9% compared to peers, indicating that the company operates efficiently and generates attractive returns for its investors.

    Both InvestingPro's models and the assessments of Wall Street analysts indicate that Tactile Systems Technology's stock is currently undervalued. Based on current prices, InvestingPro's models estimate an undervaluation of 51% ($24.53), while Wall Street provides an average target price of $20.67 - a clear indication that the company still has plenty of room for growth and potential for investors.

    Fair Value

    Source: InvestingPro

    2. Progyny

    In a time marked by numerous economic challenges, there are companies consistently making their way to success. One of these companies is Progyny (NASDAQ:PGNY), a pioneer in the field of benefits management specializing in fertility and family-building solutions.

    Last year, Progyny generated revenue of $1.08 billion, a 38% increase compared to the previous year. In the fourth quarter alone, revenue rose by 26% to $269.9 million.

    But it's not just revenue reaching new records; the company's net income almost doubled compared to the previous year. For the entire year, net income amounted to $62.0 million or $0.62 per diluted share, compared to $30.4 million the previous year. In the fourth quarter, net income practically quadrupled to $13.5 million or $0.13 per diluted share.

    Revenue and Profits

    Source: InvestingPro

    Taking a closer look at Progyny's profitability, the company impresses with its gross margin and adjusted EBITDA. The gross margin improved to 21.9%, thanks to ongoing efficiency enhancements in Care Management Services. The adjusted EBITDA for the full year reached a record $187.1 million, a 49% increase compared to the previous year.

    Another reason for Progyny's joy is the growth of its customer base, which grew to 392 customers by the end of 2023 - a significant increase from the previous year's 288 customers.

    For the year 2024, Progyny remains optimistic, forecasting revenue between $1.28 billion and $1.31 billion and net income between $68.1 million and $73.6 million. Adjusted EBITDA is expected to range between $224.0 million and $232.0 million. Analysts are also confident about the more distant future, with revenue growth expected to stabilize at around 20% through 2027.

    Revenue and EPS Forecasts

    Source: InvestingPro

    While the stock only gained 15% last year, InvestingPro's models predict a return potential of over 30% for 2024. This could bring the stock closer to its fair value of $46.6, which is also the target price of Wall Street analysts. Fair Value

    Source: InvestingPro

    Progyny can also convince in terms of financial health with a quality score of 4 out of 5 points.

    Financial Health

    Source: InvestingPro

    3. Crocs

    Another company standing out in the small-cap sector is Crocs (NASDAQ:CROX), the manufacturer of the popular foam clogs, whose recent quarterly earnings exceeded analyst expectations. In response, the stock surged.

    In the three months ending December 31, 2023, Crocs generated revenue of $960 million, an increase of less than 2% compared to the same period last year. While the core Crocs segment saw double-digit growth, the HeyDude segment continued to face some challenges, experiencing a sales decline of over 18% in the fourth quarter.

    For the full year, Crocs reported record revenue of nearly $4.0 billion, up 11.5% from the previous year. The operating margin improved by 230 basis points from 23.9% in the previous year to 26.2%.Revenue and Profits

    Source: InvestingPro

    Overall, the management expressed confidence.

    "We start the year 2024 from a position of strength and seize the opportunity to invest in several strategic key areas to lay the groundwork for sustainable market share gains," emphasized CEO Andrew Rees in a statement.

    For the current fiscal year, management expects revenue growth between 3 and 5%. While investors may not be entirely satisfied with this single-digit growth potential, Crocs remains on a growth trajectory.

    The company continues to be in growth mode, as reflected in market estimates. An average revenue growth of 5.2% and an EPS growth of 7.2% are expected over the next three years.

    Analyst Revenue Forecast

    Source: InvestingPro

    Analyst EPS Forecast

    Source: InvestingPro

    With an operating margin of 26.2% in 2023, Crocs is one of the most profitable shoe manufacturers in the peer group, even better than Nike (NYSE:NKE) with only 11.9%.

    InvestingPro's models predict a potential return of 25.5% for Crocs stock, which could rise to $158.08. This assessment is also shared by Wall Street, with an average target price of $137.04. Fair Value

    Source: InvestingPro

    The quality score from InvestingPro confirms Crocs' very good financial condition.

    Financial Health

    Source: InvestingPro

    Despite challenging economic circumstances, Crocs proves its resilience and its ability to deliver solid performance in difficult times.


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