Small-Cap Slam Dunks: 3 Russell 2000 Stocks to Own This March
The market hasn’t been kind to small-cap stocks. Over the last three years, the Russell 2000 index lost over 11% of its value compared to 30% gains by its larger brethren in the S&P 500. Rampant inflation and rising interest rates hit small-cap stocks far harder than the largest stocks on the market.
Yet, beginning from the stock market’s low point in late October, small-cap stocks have outperformed virtually all others. The Russell 2000 is up 25% since then, while the S&P trails behind with a 24% gain and the Dow Jones Industrial Average is up 19%. Only the tech-heavy, AI-driven Nasdaq 100 has done better — but even then it’s only up 24%.
All this could have been foretold. Over long periods of time, small-cap stocks handily outperform mid-and-large-cap stocks. After years of lagging performance, small companies are coming into their own again. With inflation lower and interest rate cuts possible later in the year, expect to see the small-cap index really take charge once more.
Investors can use the opportunity to buy now for the rocket ride to come. Below are three unstoppable Russell 2000 stocks ready to run higher.
DigitalOcean (DOCN)
Cloud services platform DigitalOcean (NYSE:DOCN) is a perfect way to play the small-cap boom. Tiny companies are utilizing the efficiency of the cloud to store data, even as they often can’t afford the expense of the major platforms. DigitalOcean makes cloud computing accessible by simplifying the move for startups and SMBs.
Looks like the stock is responding — DigitalOcean reported 2023 revenue jumped 20% to $693 million and turned a year-ago loss of $27.8 million into profits of $19.4 million. The cloud services platform also doubled the free cash flow it generated to $156 million. Management also approved a $140 million stock buyback program to boost shareholder value.
It ended the year with net dollar retention rates at 96% compared to 112% a year ago. Yet, that’s not unexpected. NDR is the amount of new money existing customers spend with it each year. It had been rising sharply for the past few years but turned south last year as interest rates took a toll on company spending.
DOCN stock gained 63% since it was first identified last November as a small-cap stock ready to soar. The situation has only improved since then. Should interest rates start falling, we should see DigitalOcean swamp the indices with new growth.
Ensign Group (ENSG)
With a market valuation of $7 billion, skilled nursing facility specialist Ensign Group (NASDAQ:ENSG) stretches the definition of a small-cap stock. Yet, the Russell 2000 member is enjoying steady growth, with ENSG stock up 37% over the past year.
Ensign is a leading operator in the space with 302 healthcare facilities, including 27 senior living operations, across 14 states. Part of its expansion plans are a growth-by-acquisition strategy. Over the past decade, Ensign has acquired 238 facilities that tripled the number of skilled nursing beds in its portfolio.
Although just 44% of its facilities are four- or five-star rated, that’s because it acquires many one- and two-star rated facilities and upgrades them over time.
Ensign has a proven, successful acquisition strategy that should allow it to keep growing over the years.
SoundHound AI (SOUN)
Music identification app SoundHound AI (NASDAQ:SOUN) has been on a tear. After Nvidia (NASDAQ:NVDA) disclosed it owned about $3.7 million worth of SOUN stock, it was off to the races. Shares are up 133% in just one month.
While the music ID app may be what it’s best-known for, SoundHound’s voice AI technology can also be found in automobiles, TVs, internet of things devices and even in customer service situations. Yet, there is risk, too.
SOUN stock’s biggest customers are Tier 1 automakers such as Stellantis (NYSE:STLA). However, just two of its customers accounted for 62% of total revenue in 2023. Although that’s down slightly from 67% the year before, it is still a considerable customer concentration risk. Should some of those customers switch to Microsoft‘s (NASDAQ:MSFT) Nuance Dragon, for example, SOUN could take a substantial sales hit.
While investors should be mindful of the risk, SoundHound looks strong, even after the run up. Back in January, before all the Nvidia hoopla, SOUN was certainly a riskier stock. Yet, this could be a diamond in the rough for investors willing to let this company develop its own voice. Expect to hear a lot more noise from this voice AI leader.
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.
