The 1 Stock I'd Buy Before Vanguard's VTWO Right Now

There are plenty of good reasons to buy Vanguard Russell 2000 (NASDAQ: VTWO) these days. It's a Vanguard index fund, so you know you're getting access to a basket of stocks at a low cost. Vanguard Russell 2000's 0.03% expense ratio means that the fund operator will take just $30 out of a $10,000 position over the course of the year to cover its management fees.

There's also the allure of the index. The Russell 2000 consists of the smallest two-thirds of the Russell 3000. Trading at an earnings multiple in the high teens may not seem cheap, but the Russell 2000 is a bargain compared to the more widely followed market gauges.

Momentum is also in the ETF's favor. After years of underperformance, small-cap stocks have been resilient market beaters over the past year.

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Now comes the hard part. There is nothing wrong with the Vanguard Russell 2000 offering. It's one of the best -- if not the best -- Russell 2000 ETFs. I wanted to pick one name from the index that could perform even better. I decided to screen only for stocks yielding more than the index average of 1.1%, and that eliminated about two-thirds of the entries. Then I nixed any stocks in the Russell 2000 that are currently losing money or have an earnings multiple above 18. This cut that playing field in half.

Many of what I was left with were financial stocks. That's not surprising given how financial services investments tend to have low valuations and reasonable yields. One final screen: I decided to screen for earnings growth by limiting the forward P/E ratio to less than 5. That left me with a mere four stocks in the Russell 2000. I found what I was looking for. We meet again, Upbound (NASDAQ: UPBD).

A new lease on life

You might be familiar with Rent-A-Center, the retailer offering customers lease-to-own deals on furniture, consumer electronics, and appliances. This is Upbound. It rebranded in 2023 after 50 years of financial obscurity. Under the new name, Upbound has broadened its scope beyond its own storefronts.

Upbound also runs Acima, a platform that enables other retailers to offer a similar lease-to-own financing model for purchases. Instead of merely its roughly 1,700 namesake stores, Acima gives Upbound a way to cash in through 11,000 other retailers. Upbound also recently acquired the popular budget smartphone app Brigit. It's a personal finance app with more than 12 million users. The free app helps users beef up their credit score ratings through budgeting advice, expense planning, and even access to small cash advances.

All three businesses have a common theme. For cash-strapped renters, leasing furniture and consumer electronics is the only viable way to access household essentials and connectivity tools. Acima gives other retailers a way to drum up incremental sales with a similar model. Brigit educates an even larger audience with its well-rated app.

Put it all together, and Upbound should be a pretty popular stock that scratches the itch for value, growth, and income investors. Revenue is growing in the high single digits. It has consistently topped analyst quarterly profit targets over the past year. Upbound also shares the wealth with a hearty 7.6% dividend yield. It can easily cover the generous distributions because it's expected to earn $4.65 a share this year, giving it a forward earnings multiple of just 4.4.

It's not perfect, hence the low valuation. Its leverage could prove problematic, and the stock has fallen sharply after lackluster 2022 and 2023 performances. I still find it one of the more interesting turnaround opportunities for 2026, and it just happens to be in the Russell 2000.

Rick Munarriz has positions in Upbound Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.