The current market sentiment is one of extreme fear, with widespread selling across many small-cap stocks, especially those in the Russell 2000 index. A variety of factors, including tariffs and broader market uncertainty, have led to this wholesale selling, and as a result, many fundamentally strong small companies are being punished. However, for those willing to take a closer look, this fear-induced market drop may present some excellent investment opportunities.
On Friday, the Russell 2000 was down 27%, a sharp decline that reflects how smaller companies, particularly those in this index, are feeling the brunt of the market’s volatility. The Russell 2000 is made up of small-cap companies, which are inherently more volatile and have less liquidity than larger companies. As a result, they tend to experience more extreme price swings in response to broader market movements. This has created a situation where many small-cap stocks are now trading at huge discounts.
Take, for example, FreightCar America (RAIL). Just last December, this stock was trading at around $14. Now, it’s hovering around $4.50. Despite the severe decline, this is a stock that is fundamentally sound. The company is exempt from tariffs, has improved its financials with a successful refinancing deal in December, and has a solid business model. Yet, the stock continues to trade lower because of the broader market selloff affecting the Russell 2000 ETF. This creates a disconnect between the company’s true value and its current price.
Similarly, Graham (GHM), a defense manufacturer, was trading at $52 just a few months ago. Today, it’s at $27, representing a 50% discount on a fundamentally strong company. The Trump administration’s push to build more ships should actually work in Graham’s favor, making this steep decline even more perplexing. The fear in the market has led to excessive selling, but for long-term investors, this represents a buying opportunity.
And then there’s Eledon Pharmaceuticals (ELDN), a biopharmaceutical company whose stock has dropped from $5.50 to $2.80. This is a company with improving fundamentals, particularly positive patient data, yet the stock price has fallen sharply. This disconnect between price and performance highlights how the selloff has been more about broader market panic than about the company’s intrinsic value.
The bottom line is that there are real bargains out there in small-cap stocks for individual investors who are willing to look past the short-term fear. The Russell 2000 index has been hit harder than other indexes due to the smaller size and lower liquidity of the companies involved. As a result, the impact of impulsive, panic-driven selling is more pronounced in this index than in the larger ones.
For investors with staying power, particularly those with a 2-3 year horizon, the current market turmoil presents a significant opportunity. Many of these companies, which are being unfairly dragged down by the broader market, have strong fundamentals and the potential to rebound once market sentiment stabilizes. As the market continues to digest these challenges, patient investors may see significant returns as these companies recover and grow.