The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here is one Russell 2000 stock that could be the next big thing and two that may struggle to keep up.
Two Stocks to Sell:
Funko (FNKO)
Market Cap: $180.2 million
Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ: FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.
Why Should You Sell FNKO?
- Lackluster 6.8% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $3.20 per share, Funko trades at 4.8x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why FNKO doesn’t pass our bar.
Nabors Industries (NBR)
Market Cap: $1.17 billion
Operating one of the largest land-based drilling rig fleets in the world with over 285 rigs across more than 15 countries, Nabors Industries (NYSE: NBR) operates drilling rigs and provides related services to help oil and gas companies drill wells on land and offshore platforms.
Why Are We Cautious About NBR?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.9% annually over the last ten years
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 39.1%
- Low free cash flow margin of 3% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Nabors Industries’s stock price of $80.00 implies a valuation ratio of 3x forward EV-to-EBITDA. If you’re considering NBR for your portfolio, see our FREE research report to learn more.
One Stock to Buy:
Graham Corporation (GHM)
Market Cap: $899.7 million
Founded when its founder patented a unique design for a vacuum system used in the sugar refining process, Graham (NYSE: GHM) provides vacuum and heat transfer equipment for the energy, petrochemical, refining, and chemical sectors.
Why Will GHM Outperform?
- Annual revenue growth of 15% over the last two years was superb and indicates its market share increased during this cycle
- Earnings growth has trumped its peers over the last one years as its EPS has compounded at 83.3% annually
- Free cash flow margin jumped by 15.4 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
Graham Corporation is trading at $81.36 per share, or 44.8x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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