The novel coronavirus pandemic has dominated the first half of 2020. One of the main themes that emerged during this crisis is the premium investors are placing on large-cap stocks, especially in the tech space. Just to put things in perspective, the S&P 500 Index has regained a lot of lost ground and is now up over 5% year to date, very impressive considering where we were in March. However, the iShares Russell 2000 ETF (NYSEARCA:IWM) is down almost 8% over the same period. This is despite several Russell 2000 stocks doing well during this time.
A lot of investors tend to favor safety and security above everything else. That’s why you see big tech juggernauts like Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) dominating headlines these days.
But these stocks are trading at extremely high premiums — too expensive for retail investors. In comparison, Russell 2000 stocks are trading at relative bargains. These gold nuggets often get overlooked among the more prominent players because they don’t get enough good press.
Here are five stocks that have excellent fundamentals and are trading at an attractive entry point:
- Farmer Mac (NYSE:AGM)
- The Bank of N.T. Butterfield & Son (NYSE:NTB)
- Employers Holdings (NYSE:EIG)
- UniFirst (NYSE:UNF)
- K.B. Home (NYSE:KBH)
Russell 2000 Stocks: Farmer Mac (AGM)
Dividend Yield: 4.6%
The Federal Agricultural Mortgage Corporation, also known as Farmer Mac, is a stockholder-owned company created to provide cheaper capital to farmers and rural communities. It functions as a secondary market for agricultural loans. The financial institution either buys the loan and holds them as an investment, or sells instruments backed by those loans.
Farmer Mac is a vital constituent of the Russell 2000 Index and is one of the safest stocks you can find. A relatively small company with a market cap of $750 million, it has performed consistently over the past five years, even during the novel coronavirus pandemic. Despite the challenging conditions, loan growth is a healthy 8.5% year-to-date, and don’t forget the excellent dividend yield of 4.6%.
Now for the most exciting tidbit. Despite being such a strong performer, AGM stock trades at a reasonable 8.86 times forward price-to-earnings. I believe its a steal at current rates, especially considering the implied government guarantee.
The Bank of N.T. Butterfield & Son (NTB)
Dividend Yield: 7.03%
Butterfield is an offshore bank founded and based in Bermuda. Conservatively capitalized, it offers an attractive 7% dividend yield. The bank has operations all over the world, including Bermuda, the Cayman Islands, the Channel Islands, and Switzerland. And don’t let the “offshore bank” title scare you off. Butterfield is no fly-by-night operation. Founded in 1858, Butterfield is the largest bank operating in Bermuda and the Cayman Islands.
By operating as an offshore bank, Butterfield avoids regulatory costs, but that doesn’t make it exempt from international law. Although the bank can help its clients avoid legal fees, it cannot legally help clients tiptoe around taxes. But an offshore bank does offer safety and security to park your undeclared income, especially if your home country is suffering from economic or political turmoil.
Another heartening to note is the bank’s massive cash pile. As of the latest financials, it has $2.64 billion on the books, a sizeable chunk of its balance sheet. Butterfield has used that cash for acquisitions, share repurchases, and paying a considerable dividend. Money well spent, in my opinion.
Now comes the best part — valuation. Shares are trading at a P/E of 8.19 times, an almost 20% discount to the sector. With a healthy payout ratio, excellent dividend yield, and robust earnings growth, NTB stock will be a substantial addition to your portfolio.
Employers Holdings (EIG)
Dividend Yield: 3.14%
In today’s day and age, there is a penchant to load up your portfolio with companies that are going gung-ho towards growth. Having an aggressive strategy is good, but stability is also something that should merit consideration, especially considering the volatility of the markets. That’s where EIG stock comes in.
A workers’ compensation insurance provider focused on servicing small businesses; it has a disciplined growth strategy that has paid dividends. EIG stock remains an excellent investment for conservative investors that want a company with solid fundamentals and prudent management. That’s not to say the company does not lose out due to its strategy. Indeed, that has been a running theme for the company, with the average renewal rate taking a beating from time to time. But the important thing is that the company does not compromise its underwriting standards under any circumstances.
In summary, EIG is an outstanding stock that provides a stable return to shareholders. Understandably, some investors would want companies to pursue any and every opportunity. But you should always reserve brownie points for institutions that perform due diligence on their investments.
Dividend Yield: 0.53%
UniFirst is the third-largest uniform rental company in the U.S., with a market share of 12%. In many ways, it is the ideal stock to have in any portfolio, boasting solid fundamentals, a clean balance sheet, and a huge cash pile. It provides services to Coca-Cola (NASDAQ:COKE), Honeywell (NYSE:HON), Walmart (NYSE:WMT), and Costco (NASDAQ:COST), among other large companies.
You may be wondering what the fuss is about? Many large companies can afford to make uniforms on their own. While that may be true, manufacturing and then updating uniforms is a costly affair, not to mention the extra expenses that come with employee turnover. That’s why UniFirst operates in an excellent niche market that can only grow from here.
In fiscal Q3, the company bore the brunt of Covid-19 with a slowdown in business, but I believe this is a temporary phenomenon. Its five-year average net income and EBIT margins of 8.3% and 12.1%, respectively, are the second-highest in the sector. Meanwhile, UniFirst is sitting on a substantial cash pile of $421.3 million that it can use after the pandemic to repurchase stock and acquire embattled competitors.
From a valuation perspective, UNF stock is trading at a P/E of 24.63 times. That is undoubtedly steep, but not when you see that shares of peer Cintas (NASDAQ:CTAS) are trading at 40.88 times. Considering the zero-debt balance sheet, I believe that UNF stock is the best in the sector.
K.B. Home (KBH)
Dividend Yield: 1.06%
K.B. Home is a home builder that has been around since 1957. Due to Covid-19, the stock took a beating, and its recent quarterly results did not help matters. New orders are understandably down due to the virus. Still, there are positive trends in the third quarter that should act as a tailwind moving forward — the first three weeks of June saw orders increase on a year on year basis despite the virus situation.
The gross margin was also up in Q2 by 100 basis points, aided by the mix of homes delivered. This is particularly impressive, considering the drop in volume growth because of Covid-19. With such strong performance during the pandemic, I believe it will only be a matter of time before we see KBH stock return to pre-pandemic numbers.
The virus will act as a catalyst in many ways for the homebuilder. The pandemic has resulted in several people leaving cities to settle in the suburbs. That trend is unlikely to let up once this crisis is over.
I believe the time is right to snap up some KBH stock. Shares are trading at $34.59, a very steep discount to the 52-week high of $40.51 a pop. Any stock that trades at an almost 50% discount to the sector is undoubtedly attractively valued. With net orders trending upward, expect KBH shares to make up for lost ground within the year.