The Russell 2000 (^RUT) is packed with potential breakout stocks, thanks to its focus on smaller companies with high growth potential. However, smaller size also means these businesses often lack the resilience and financial flexibility of large-cap firms, making careful selection crucial.
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 deliver strong gains and two that may face some trouble.
Two Stocks to Sell:
Teladoc (TDOC)
Market Cap: $1.21 billion
Founded to help people in rural areas get online medical consultations, Teladoc Health (NYSE: TDOC) is a telemedicine platform that facilitates remote doctor’s visits.
Why Is TDOC Not Exciting?
- Sales trends were unexciting over the last three years as its 6% annual growth was below the typical consumer internet company
- Focus on expanding its platform came at the expense of monetization as its average revenue per user fell by 5.3% annually
- Estimated sales decline of 1.3% for the next 12 months implies a challenging demand environment
At $6.92 per share, Teladoc trades at 4x forward EV/EBITDA. Dive into our free research report to see why there are better opportunities than TDOC.
Kratos (KTOS)
Market Cap: $5.40 billion
Established with a commitment to supporting national security, Kratos (NASDAQ: KTOS) is a provider of advanced engineering, technology, and security solutions tailored for critical national security applications.
Why Does KTOS Worry Us?
- 7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Kratos is trading at $35.38 per share, or 64.8x forward P/E. Check out our free in-depth research report to learn more about why KTOS doesn’t pass our bar.
One Stock to Buy:
Construction Partners (ROAD)
Market Cap: $5.63 billion
Founded in 2001, Construction Partners (NASDAQ: ROAD) is a civil infrastructure company that builds and maintains roads, highways, and other infrastructure projects.
Why Are We Bullish on ROAD?
- Demand for the next 12 months is expected to accelerate above its two-year trend as Wall Street forecasts robust revenue growth of 40.3%
- Earnings per share have massively outperformed its peers over the last two years, increasing by 91% annually
- Free cash flow margin didn’t grow over the last five years
Construction Partners’s stock price of $100.85 implies a valuation ratio of 42.6x forward P/E. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
High-Quality Stocks for All Market Conditions
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