While broader markets face continued pressure amid recession fears, small-cap stocks stand out as an undervalued segment of the stock market. The Russell 2000 index, the popular benchmark for small-cap stocks, is currently down 18% over the past year. Meanwhile, the S&P 500 index has declined less than 12% during the same period.
Seasoned investors realize that a smaller company typically has more room for exponential growth in terms of both business operations and share price. In addition, many small-cap stocks offer rapid exposure to secular growth themes such as technology and health care.
U.S. small-cap stocks tend to have a more domestic focus than large-caps. Thus, a significant portion of revenue comes from domestic operations. As a result, the health of the U.S. economy becomes particularly critical for their performance.
In this context, worries about a potential recession have meant headwinds for many small-cap stocks. Now, analysts debate whether most of the bad news about our economy may already be factored into the share prices of many these small businesses.
History also shows us that it is not possible to exactly time the market. Once investor sentiment turns bullish again, small-cap stocks are primed to become the largest outperformers on Wall Street. Therefore, September could be a good time to buy.
With that information, here are the seven small-cap stocks to buy now for lucrative long-term returns.
Avantis US Small Cap Value ETF
Diversified Healthcare Trust
Vanguard S&P Small-Cap 600 Growth ETF
Avantis US Small Cap Value ETF (AVUV)
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52-week range: $66.20 – $84.59
Dividend yield: 1.72%
Expense ratio: 0.25% per year
We start our discussion with an exchange-traded fund, namely the Avantis US Small Cap Value ETF (NYSEARCA:AVUV). This actively-managed fund mainly invests in a broad range of U.S. small caps that are highly profitable.
AVUV tracks the Russell 2000 Value Index and currently has 682 holdings. It was first listed in September 2019. In terms of sectoral allocations, financials lead the fund with 30%, followed by consumer discretionary (17%), energy (16%) and industrials (16%).
The top 10 stocks in the portfolio account for 7.5% of its net assets of $3.6 billion. Intermodal container leasing company Triton International (NYSE:TRTN); logistics and transportation specialist Ryder System (NYSE:R); motor fuel products retailer Murphy USA (NYSE:MUSA); aircraft leasing company Air Lease (NYSE:AL); and sporting and outdoor goods retailer Academy Sports & Outdoors (NASDAQ:ASO) are among the leading names on the roster.
The ETF has lost roughly 9% year to date. At the current price level, long-term investors can find significant value in a small-cap fund like AVUV.
Diversified Healthcare Trust (DHC)
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52-week range: $1.30 – $3.98
Real estate investment trust (“REIT”) Diversified Healthcare Trust (NASDAQ:DHC) concentrates on healthcare-related properties, including senior living communities, life science estates, and medical offices.
The healthcare REIT released Q2 results on Aug. 3. Revenue declined 10% year-over-year to $313 million. Normalized funds from operations stood at negative 4 cents per share, compared to 5 cents in the prior-year quarter. Cash, equivalents, and restricted cash ended the quarter at $868.4 million.
Management highlighted that occupancy across the industry increased during the quarter. Average asking rents also increased, especially in the assisted living space. Consolidated shop occupancy jumped 60 basis points from the prior quarter. Office Portfolio leasing activity was also strong, with a 9.1% increase from prior rents.
Meanwhile, in late July, Diversified Healthcare Trust announced the acquisition of 89,000 square feet of rentable space in the San Francisco Bay area. This property is leased to Alamar Bioscience through 2034.
DHC stock is down almost 55% year to date but supports a dividend yield of 2.9%. Shares are trading at just 0.3 times sales and 0.12 times book value. Anlaysts’ 12-month median price forecast for DHC stock stands at $2.
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52-week range: $7.65 – $12.04
Long-term shareholders regard Landec (NASDAQ:LNDC) as an innovator of diversified health and wellness solutions. It has differentiated capabilities in developing and filling sterile injectable pharmaceutical products in vials and syringes.
Management is expected to rename the company Lifecore Biomedical in the coming months, trading under its new ticker ‘LFCR’ on the Nasdaq. The healthcare play announced Q4 results on Aug. 10. Revenue grew 6% YOY to $47.6 million.
However, diluted loss per share jumped to $1.24, up from a 10 cents loss in the prior-year quarter, mainly due to supply chain issues in the Curation Foods business. Cash and equivalents ended the period at $1.6 million.
Top line growth was primarily driven by a 6.9% increase in Lifecore Biomedical segment revenue and a 4.9% increase in Curation Foods segment revenue. In early June, Landec announced the sale of its Curation Foods’ BreatheWay business for $3.2 million.
The divestiture could help management focus more on the Lifecore segment. During fiscal year 2023, management anticipates Lifecore segment revenue to grow by 12% to 15% to a range of $122 million to $126 million.
52-week range: $29.95 – $48.66
Retailer Movado (NYSE:MOV) is well-known for its watches in the accessible-luxury segment. It has a market cap of over $670 million.
Management released Q2 results in late April. Net sales came in at $182.8 million, up 5.1% from last year. Adjusted EPS was $1.07, up 27.8%. Wall Street noted that Movado has a strong balance sheet, and is debt free.
Recent research highlights that last year the global luxury watch market was worth close to $28.5 billion, and should exceed $33 billion in 2026. Therefore investors pay attention to metrics from Movado and its peers.
MOV shares are down about 27% YTD and just above 52-week lows. The current price supports a dividend yield of 4.6%.
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52-week range: $36.24 – $63.61
Cybersecurity specialist Tenable (NASDAQ:TENB) focuses on threat detection and vulnerability management. Tenable’s Nessus platform is a highly regarded vulnerability management tool, serving around 60% of the Fortune 500 companies.
Tenable released Q2 metrics in late July. Revenue jumped 26% year over year to $164 million. However, adjusted diluted EPS declined to 5 cents, down from 9 cents in the prior-year quarter. Cash, equivalents, and short-term investments ended the period at $511 million.
The number of clients spending $100,000 or more on Tenable platforms jumped 27% year over year to 1,191. Analysts favor high-spending cybersecurity customers, which typically means higher profit margins for Tenable over time.
On June 6, Tenable announced closing the acquisition of Bit Discovery, a company specialized in external attack surface management. In the third quarter, the company is expected to launch Tenable.asm to provide the full capabilities of Bit Discovery’s technology.
The company anticipates generating $676 million in sales during fiscal 2022. However, the outlook for Q3 suggests slower growth and lower profitability than the previous year.
So far in 2022, TENB stock has lost 27%. Despite the decline, shares are trading at a rich valuation of 120 times forward earnings and 7.1 times sales. Therefore, investors may regard a decline toward $38 as a better entry point. Wall Street’s 12-month median price forecast for Tenable stock is $55.
Vanguard S&P Small-Cap 600 Growth ETF (VIOG)
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52-week range: $173.77 – $249.46
Dividend Yield: 1.04%
Expense ratio: 0.15%
Next up on our list is the Vanguard S&P Small-Cap 600 Growth ETF (NYSEARCA:VIOG). It invests in a range of growth stocks, relying on factors such as sales growth, earnings change to price ratio, and price momentum.
VIOG, which began trading in September 2010, has close to $490 million under management. With 338 holdings, the ETF tracks the S&P Small-Cap 600 Growth Index.
In terms of sectoral allocation, information technology has the highest share with 20%, followed by financials (16%), industrials (15%), health care (15%), and consumer discretionary (13%).
The leading ten holdings account for roughly 11% of the fund’s assets. They include wood and non-wood composite supplier UFP Industries (NASDAQ:UFPI); data analytics company ExlService (NASDAQ:EXLS); science and engineering consulting group Exponent (NASDAQ:EXPO); engineered materials manufacturer Rogers (NYSE:ROG); and energy company SM Energy (NYSE:SM).
The fund is down 18% year to date. Price-to-earnings and price-to-book ratios stand at 12.8x and 2.5x, respectively. Potential investors could consider buying the dips in VIOG.
Vista Energy (VIST)
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52-week range: $4.08 – $10.57
The last small-cap stock on our list is the Mexico-based oil and gas company Vista Energy (NYSE:VIST). Its operations are primarily focused on shale oil and shale gas exploration at its core assets in Vaca Muerta, Argentina.
On July 26, Vista announced Q2 results. Revenue increased 78% year over year to $294 million. Adjusted EPS came in at 93 cents, compared to 20 cents in the prior-year quarter. In addition, the company generated $63 million in free cash flow, adding to its $251 million cash position.
Q2 financials indicated solid growth and profitability, benefiting from strong energy prices and rising output. Top-line growth in the second quarter was driven by a 17% boost in oil production and a 43% increase in realized oil prices.
Management also updated its full-year 2022 guidance. Vista anticipates 2022 will end with a production run rate above 52 thousand barrels of oil equivalent per day, representing a 16% increase from Q2 levels.
On the date of publication, Tezcan Gecgil, Ph.D., 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.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.