Small-cap stocks continue to struggle in the high interest rate environment created by the Federal Reserve. The S&P 600 small-cap index is down 3% in 2024 compared to a 12% gain by the 500 largest stocks on the market. However, there are still several promising S&P 600 stocks to buy that may offer growth opportunities once growth conditions stabilize.
Interest rate policies negatively impact smaller companies more than their larger brethren because the higher borrowing costs eat up more of their limited financial resources. The higher-for-longer scenario the Fed created could weigh on the index for the rest of the year. Several Fed regional bank presidents have said they want to see sustained progress on inflation before agreeing to rate cuts. With the recent jobs report being stronger than expected, small-cap stocks likely won’t see relief anytime soon.
Yet, as I said, there are still numerous excellent S&P 600 stocks to buy. These companies have strong tailwinds behind them that will eventually overcome the headwinds they face. The following three stocks are some of the best opportunities amongst small-cap stocks.
Badger Meter (BMI)
Shares of Badger Meter (NYSE:BMI) are up over 20% in 2024, belying the strong currents it supposedly swims against. Yet it had a phenomenal year last year, too, with shares rising 41%, so this could become the norm for this small-but-growing smart water meter company.
There are more than 50,000 water utilities in the U.S. It estimates one-third of water meters installed have been converted to advanced metering infrastructure (AMI) that allows for remote data collection. Most of the remaining have what are known as automatic meter reading (AMR) technology, which requires a utility worker to collect the data.
As the industry continues to undergo a conversion from manually read meters to AMR systems, Badger looks to further upgrade connections to AMI systems. Business is booming. Revenue jumped 23% in the first quarter as operating profits jumped 46% year over year and earnings surged 50% to 99 cents per share from 66 cents a year ago.
As labor costs rise, utilities — another industry hit hard by high interest rates — will find these advanced metering systems a long-term cost savings. It provides a substantial runway for future growth for Badger Meter.
Sturm, Ruger (RGR)
According to the National Shooting Sports Foundation (NSSF), there are 22.3 million new first-time gun owners since 2020 — “approximately the population of the state of Florida.” It suggests that of all the people buying firearms each year, between 30% and 40% of them are new gun owners. The NSSF says historically the rate is between 20% and 24%.
As personal protection is the primary concern when individuals decide to purchase a gun, that bodes well for Sturm, Ruger (NYSE:RGR), one of the world’s largest firearms manufacturers. Q1 sales were down year-over-year but rose sequentially from the Q4 — though gross margins narrowed. That’s because of higher demand for a product mix carrying lower margins.
However, unit sell-through from independent distributors to retailers (Ruger doesn’t sell directly to the public) rose 1% against a 4% decline in FBI criminal background check data as adjusted by the NSSF.
While you likely won’t often find Sturm, Ruger stock selling at a premium, shares currently go for a discount. It trades at 18 times earnings, which tends to be lower than where it has traded over the past decade, while offering a price-to-sales ratio of 1.4, which is historically low as well for the gunslinger. With millions more Americans buying guns and millions more owning a firearm for the first time every year, expect Ruger to begin shooting out the lights.
Universal (UVV)
Tobacco leaf distributor Universal (NYSE:UVV) saw its stock walloped after reporting fiscal fourth-quarter results last month. Shares are now down 30% in 2024, which represents an excellent opportunity for investors.
Although sales were up 7% for the year and gross margins increased by 167 basis points to 19.5%, net earnings dropped 4% year-over-year to $4.78 per share. That was due in part to Universal investing in new supply in Brazil. The tobacco leaf market is currently tight, causing higher green leaf prices. That forced Universal to increase its use of working capital and take on more debt. In this high-rate environment, that isn’t advantageous.
Still Universal expects the leaf market to rebalance and its position to naturally unwind within two years. Investors should use the opportunity to pick up Universal stock cheap.
It supplies all three major U.S. cigarette makers, as well as the world’s largest cigarette maker, China Tobacco International. At 9 times earnings and going for a fraction of its sales and book value, Universal is one of the S&P 600 stocks to buy at a steep discount.
On the date of publication, Rich Duprey did not hold (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.