After lagging the S&P 500 for much of 2024, the Russell 2000 small cap index has staged an impressive rally in recent weeks. As smaller companies catch up to their large cap counterparts, investors may be wondering which Russell 2000 stocks look most attractive. Using Validea’s guru-inspired stock rating models, we’ve identified 5 top-rated small caps that are scoring well across multiple investing strategies. Validea’s models use the fundamental strategies of historically successful investors like Warren Buffett, Peter Lynch and 20 others to identify the most fundamentally sound stocks.
AX – Axos Financial
Axos Financial is earning high marks from several of Validea’s guru models:
Patient Investor (Warren Buffett) Model: 100% Score
Axos passes all of the key criteria in our interpretation of Warren Buffett’s investing approach:
- Consistent earnings growth over the past decade, with only minor dips
- Strong average return on equity of 15.4% over 10 years
- Manageable debt levels
- Projected 10-year return of 16.8% based on current fundamentals
P/E Growth (Peter Lynch) Model: 100% Score
The stock also earns a perfect score on our Peter Lynch-inspired model:
- Very favorable PEG ratio of 0.37
- Earnings growth rate of 25.3% falls in the ideal 20-50% range
- P/E ratio of 9.45 is well below the model’s upper limit
Growth Investor (Martin Zweig) Model: 92% Score
Axos shows the earnings momentum and consistency favored by this growth-focused approach:
- Strong quarterly earnings growth (44.7% year-over-year)
- Accelerating earnings growth in recent quarters
- Persistent annual EPS increases over 5 years
GIII – G-III Apparel Group
G-III Apparel Group is scoring highly on several value-oriented models:
Value Composite (James O’Shaughnessy) Model: 100% Score
G-III earns top marks for its attractive valuation metrics:
- Passes initial quality screen
- Ranks in the top 5% of stocks based on composite of value factors including P/B, P/S, P/E, P/CF, EV/EBITDA and shareholder yield
Acquirer’s Multiple (Tobias Carlisle) Model: 100% Score
The stock also looks cheap based on this takeover-inspired valuation approach:
- Passes quality screen
- Very low Acquirer’s Multiple (enterprise value / operating earnings) ranks in top 5% of market
Price/Sales (Kenneth Fisher) Model: 90% Score
G-III’s low valuation relative to sales is attracting attention:
- P/S ratio of 0.38 is well below the 0.75 threshold for “tremendous value”
- Reasonable debt levels
- Strong earnings and free cash flow growth
MHO – M/I Homes
Homebuilder M/I Homes is impressing our models with its growth and momentum characteristics:
Twin Momentum (Dashan Huang) Model: 94% Score
M/I Homes shows the combination of fundamental and price momentum favored by this approach:
- Strong fundamental momentum based on earnings, profitability and other factors
- Solid 12-month price momentum excluding most recent month
- Ranks in top 5% of stocks combining both types of momentum
P/E Growth (Peter Lynch) Model: 93% Score
The stock also scores very highly on our Peter Lynch-inspired model:
- Favorable PEG ratio of 0.25
- Robust earnings growth rate of 34.5%
- P/E of 8.51 is well below the model’s limit for a company of this size
Momentum Investor Model: 89% Score
M/I Homes is displaying many of the traits our momentum strategy seeks:
- Strong earnings growth and earnings momentum
- Solid relative price strength
- Industry leadership
PFBC – Preferred Bank
California-based Preferred Bank is earning high scores from value and growth models alike:
P/E Growth (Peter Lynch) Model: 100% Score
Preferred Bank gets a perfect score from our Peter Lynch-based strategy:
- Very low PEG ratio of 0.38
- Consistent earnings growth averaging 21.3% over past 3-5 years
- Strong return on assets for a financial company
Patient Investor (Warren Buffett) Model: 100% Score
The stock also impresses our Buffett-inspired approach:
- Predictable earnings growth over the past decade
- Healthy average return on equity of 15.2% over 10 years
- Projected 10-year return of 17.8% based on current fundamentals
Twin Momentum (Dashan Huang) Model: 88% Score
Preferred Bank shows strong fundamental and price momentum:
- Ranks in top 20% for fundamental momentum factors
- Solid 12-month price performance
- Narrowly misses cutoff for final combined ranking
ZEUS – Olympic Steel
Steel products company Olympic Steel is attracting attention from value-focused models:
P/E Growth (Peter Lynch) Model: 93% Score
Olympic Steel scores very highly on our Peter Lynch-inspired strategy:
- Favorable PEG ratio of 0.35
- Strong earnings growth rate of 36.9%
- P/E of 12.75 is well below the model’s upper limit
Price/Sales (Kenneth Fisher) Model: 90% Score
The stock’s low valuation relative to sales is a key factor:
- P/S ratio of 0.25 is far below the 0.75 threshold for “tremendous value”
- Acceptable debt levels
- Solid earnings growth and free cash flow generation
Value Investor (Benjamin Graham) Model: 86% Score
Olympic Steel also impresses our Benjamin Graham-inspired deep value approach:
- Adequate size with over $2 billion in sales
- Strong current ratio of 3.28
- Reasonable P/E and price-to-book ratios
Its hard to know whether the Russell’s big run will continue. But with small-cap stocks trading at significant discounts to their large-cap counterparts, there is a lot of value to be found within the index. These five Russell 2000 constituents are displaying many of the fundamental and technical traits that have historically attracted some of the world’s most successful investors.
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