Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
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 deliver strong gains and two that may face some trouble.
Two Stocks to Sell:
Xponential Fitness (XPOF)
Market Cap: $229.9 million
Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE: XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.
Why Do We Avoid XPOF?
- Products and services have few die-hard fans as sales have declined by 4.4% annually over the last two years
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $5.50 per share, Xponential Fitness trades at 9.9x forward P/E. If you’re considering XPOF for your portfolio, see our FREE research report to learn more.
Connection (CNXN)
Market Cap: $1.76 billion
Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ: CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.
Why Do We Think Twice About CNXN?
- Sales trends were unexciting over the last two years as its 2.5% annual growth was below the typical business services company
- Earnings per share lagged its peers over the last two years as they only grew by 6.9% annually
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3.4% for the last five years
Connection’s stock price of $69.60 implies a valuation ratio of 17.6x forward P/E. Read our free research report to see why you should think twice about including CNXN in your portfolio.
One Stock to Watch:
Brinker International (EAT)
Market Cap: $6.11 billion
Founded by Norman Brinker in Dallas, Brinker International (NYSE: EAT) is a casual restaurant chain that operates the Chili’s, Maggiano’s Little Italy, and It’s Just Wings banners.
Why Could EAT Be a Winner?
- Average same-store sales growth of 15.5% over the past two years indicates its restaurants are resonating with diners
- Economies of scale give it some operating leverage when demand rises
- Industry-leading 15.6% return on capital demonstrates management’s skill in finding high-return investments, and its rising returns show it’s making even more lucrative bets
Brinker International is trading at $142.34 per share, or 11.8x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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