Almost exactly 13 years ago, the Dow Jones Industrial Average hit a market low on March 6, 2009, after which it reversed course and went on an amazing bull run. It rose more than 20% in just three weeks and has since gained over 420%, for a compounded growth rate of 13.8% a year.
While the S&P 500 did even better, returning over 550% in that time frame, the tech-stock-laden Nasdaq exchange was really the fuel for the fire. The Nasdaq Composite index, composed mostly of tech stocks, has returned almost 1,000% in those 13 years, meaning a $10,000 investment would have grown into more than $108,000 during that period.
Data by YCharts.
Yet you don't have to invest in volatile tech stocks to achieve results that handily outperform the broad market index -- all you need to do is look toward the small-cap stocks that make up the S&P 600 index. Moreover, because companies in the index are required to meet certain liquidity thresholds and must be profitable, you're buying stocks with proven track records of having products or services that customers need and are willing to buy.
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Over the 13-year stretch of the bull market, the S&P 600 returned over 615%, handily beating the Dow and S&P 500 even if it didn't attain the heights achieved by the tech index. An initial $10,000 investment would now be a richly rewarding $71,300 nest egg.
The following trio of stocks picked from the small-cap index is perfect investments for this market pullback.
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SpartanNash
Grocery store chain SpartanNash (SPTN -1.05%) has been on a path higher even before the pandemic struck, as a change in leadership sparked a massive turnaround in the business. The stock has tripled since mid-2019 compared to a 50% rise in the S&P 500, and it's being pushed higher by activist investors who think it can do more.
Macellum Advisors and Ancora Holdings Group, two of the three investors that cleaned house at Bed Bath & Beyond (NASDAQ: BBBY) and wanted to do the same at Kohl's (NYSE: KSS), are targeting SpartanNash because of "constant chaos in the C-suite" and a lack of a specific strategy for creating shareholder value.
SpartanNash, which owns over 145 supermarkets under various banners in nine states, has responded that the hedge funds are ignoring the progress it has already made as well as its plans for "reengineering the business from top to bottom."
The grocery store chain looks like it has more room to run. Trading at 16 times earnings, it carries a discounted value of 1.6 times its book value and a minuscule 0.12 times sales, when the industry goes for 2.3 and 0.36, respectively.
In downturns and recessions, grocery stores are solid businesses because you still need to eat. And with a turnaround in progress -- even as activist investors are saying, "do more!" -- SpartanNash looks to have a runway for further growth.
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Sturm, Ruger
Sturm, Ruger (RGR -0.09%) is one of the biggest firearms manufacturers, with a history of conservative management and excellent corporate governance that continues to benefit from increasing consumer demand for personal protection. Particularly during tough economic times, demand for firearms is on a long-term growth trajectory.
Even though adjusted criminal background checks on potential gun buyers were down 19% last year as reported by the National Shooting Sports Foundation, Ruger still reported 28% sales growth, with per-share profits that were 72% higher year-over-year.
That's because the year before was an all-time record sales year for the firearms industry with unprecedented demand, especially from first-time gun buyers. So just because 2021 was down in comparison, it was still the second-biggest year since such records began. And this year is also well ahead of most other years at this time, even if slightly below last year.
Ruger trades for just 8 times earnings, one of the lowest points it's been at in the past decade, and 14 times the free cash flow it produces. With a dividend tied to its profits and currently yielding 4.4% annually, this gunmaker is a stock to buy now.
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Tootsie Roll Industries
Considering how long Tootsie Roll Industries (TR -0.36%) has been around, it's a surprisingly underrated investment. It's not a sexy business, and has stayed in its lane making popular candy. It basically does one thing and does it well.
Founded in 1896, it's been owned by the same family -- the Gordons -- since 1930, and the company has steadily outperformed the broad market index for decades. Where the S&P 500 has returned nearly 4,000% since the 1970s, Tootsie Roll has more than doubled that. It's also paid a modest dividend that has risen every single year for well over 50 years, making it a Dividend King.
Because it has remained true to its roots and is otherwise a very boring business, Wall Street doesn't even bother covering it. Arguably the biggest problem with Tootsie Roll is the control the Gordons have over the business, since they own majority voting shares. Its press releases provide the bare minimum of information. The company holds no conference calls to discuss results. It hardly publishes any financial information on its website because it says they're available from the SEC (and it will send you a copy for free if you ask). If you want to contact the company's executives or its board, you have to write chairman and CEO Ellen Gordon personally.
Yet because Gordon is 90 years old, the prospects for change are great. While it need not go far afield from the very conservative path it's on, an increase in its dividend or even buying ancillary businesses that could provide juicy growth rates are all possible.
Tootsie Roll Industries is a great company that has done well for investors. It's a stock you might buy for its dividend yield and hold for the potential growth to come.
