The stock market is testing the mettle of investors. Over the past three years, wild swings on Wall Street have ruled the day. As much as the major indices have seen new highs and dramatic lows, it’s been difficult finding Russell 2000 stocks to buy because small caps are having such a tough time.
While the S&P 500 and Nasdaq Composite are up by double digit percentages this year, the small cap index is down almost 2%. Inflation continues to weigh on shares as small businesses feel more acutely the effects of high costs. But small cap stocks remain an important component for every portfolio.
In Investing in Small-Cap Stocks, authors Christopher Graja and Elizabeth Ungar point out that over the 75-year period studied, small cap stocks beat their larger brethren 60% of the time. So even though the Russell 2000 is in one of those troughs, it suggests they may soon come into their own again. The following three stocks are unstoppable small caps investors should buy in October.
Northwest Natural (NWN)
Natural gas utility Northwest Natural (NYSE:NWN) services the Pacific Northwest states of Oregon and Washington. It also provides water service in Texas and Arizona. It’s a solid pick for long-term growth.
In business for 160 years, Northwest Natural grows through acquiring more customers and via rate increases granted by regulators. It owns a combination of distribution pipelines, transmission lines and service lines, along with several storage facilities possessing billions of gallons of capacity. At the end of June it had 2.8 million customers in 140 communities.
Northwest Natural also pays a dividend that yields 5.3% annually. It’s typically what attracts investors to utility stocks. The stability and reliability of their income streams serve as the ballast for portfolios in good times and bad. Northwest has a 67-year record of increasing its payout, making it a Dividend King.
The stock is down 21% this year due to higher operating expenses that were partially offset by higher rates. Housing is growing steadily in Oregon and Washington, which promises new service potential for the future. Northwest is also nearing completion of its first renewables project. It has commitments from several “investment grade partners” to sell the output to for the next 20 years when the project is completed.
At 13 times earnings and less than twice sales, Northwest Natural is a solid choice for continued discounted growth.
Hudson Technologies (HDSN)
Reclaimed refrigerants is a niche market with a lot of growth potential and Hudson Technologies (NASDAQ:HDSN) is the leading segment player with a 35% share of the U.S. market. Recently profitable, it is poised to capitalize on new environmental rules that promote greater reclamation projects.
Hudson is the largest supplier of green refrigerants. Congress enacted the American Innovation and Manufacturing (AIM) Act in 2020 that requires the phasing down of virgin hydrofluorocarbons (HFCs). Beginning next year, a severe shortage of necessary HFCs will materialize (it’s already starting) and Hudson is prepared to meet the massive demand for reclaimed refrigerants.
Hudson’s potential is already showing up through improved financial strength. Although revenue is down over the first six months of 2023 due to difficult comparisons to last year when growth exploded, Hudson is improving its balance sheet by paying down debt.
While the green refrigerant company got off to a rocky start this year, Hudson has since made up for it. Shares are up 30% year to date and 90% over the last 12 months. Yet it goes for just 9 times earnings estimates, a fraction of its projected 30% long-term projected earnings growth rate and a cheap 15 times the free cash flow it produces. It remains value priced even after its meteoric rise. It indicates there is much more room to run near term and over the long haul.
Smith & Wesson Brands (SWBI)
Gunmaker Smith & Wesson Brands (NASDAQ:SWBI) also has enormous tailwinds driving its business and stock higher.
Firearms ownership continues to rise. The most recent Pew Research Center survey found 72% of people say personal protection remains the primary reason people own a gun.
Smith & Wesson is the largest gunmaker in the U.S. Net sales jumped 35% in its fiscal first quarter with earnings per share flat year over year. The firearms manufacturer is feeling the impact of persistent elevated costs. The summer months are a seasonally slow period, though, and further growth is coming as we enter the hunting season.
The FBI reports monthly on the number of criminal background checks it performs on potential gun buyers. The industry trade group National Shooting Sports Foundation adjusts that raw data to remove duplicate checks of individuals with concealed carry permits to see if they are still eligible. It found August background checks of 1.12 million are down 13% from last year. Yet they are up from July’s 1.02 million checks. It is the 49th straight month the FBI has made more than 1 million criminal background checks on gun buyers.
Smith & Wesson trades at just 13 times next year’s earnings estimates. Wall Street forecasts the gunslinger will grow earnings 15% annually for the next five years. Smith & Wesson never really trades at premium valuations. Its stock, however, has long-term upward mobility baked into the business.
On the date of publication, Rich Duprey held a LONG position in NWN and SWBI stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.