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.
The high-risk, high-reward nature of the Russell 2000 makes stock selection critical, and we’re here to guide you toward the right ones. Keeping that in mind, here is one Russell 2000 stock that could be a breakout winner and two that may face some trouble.
Two Stocks to Sell:
Sally Beauty (SBH)
Market Cap: $1.26 billion
Catering to both everyday consumers as well as salon professionals, Sally Beauty (NYSE: SBH) is a retailer that sells salon-quality beauty products such as makeup and haircare products.
Why Do We Think Twice About SBH?
- Failure to add new stores points to soft demand and a focus on boosting sales at current locations
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Smaller revenue base of $3.73 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
Sally Beauty is trading at $13.23 per share, or 6.2x forward P/E. Read our free research report to see why you should think twice about including SBH in your portfolio.
Lindsay (LNN)
Market Cap: $1.14 billion
A pioneer in the field of center pivot and lateral move irrigation, Lindsay (NYSE: LNN) provides a variety of proprietary water management and road infrastructure products and services.
Why Does LNN Fall Short?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Earnings per share have contracted by 6.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $110.11 per share, Lindsay trades at 18.1x forward P/E. To fully understand why you should be careful with LNN, check out our full research report (it’s free).
One Stock to Watch:
Gevo (GEVO)
Market Cap: $451.3 million
Operating one of the largest dairy-based renewable natural gas facilities in the United States, Gevo (NASDAQ: GEVO) produces sustainable aviation fuel and other renewable hydrocarbon fuels from plant-based feedstocks like corn.
Why Does GEVO Stand Out?
- Market share has increased this cycle as its 19% annual revenue growth over the last ten years was exceptional
- EBITDA profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
Gevo’s stock price of $1.89 implies a valuation ratio of 12.9x forward EV-to-EBITDA. Is now a good time to buy? Find out in our full research report, it’s free.
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