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. That said, here are two Russell 2000 stocks that could be the next breakout winners and one best left off your watchlist.
One stock to sell:
Vital Farms (VITL)
Market cap: $398.8 million
With an emphasis on ethically produced products, Vital Farms (NASDAQ: VITL) specializes in pasture-raised eggs and butter.
Why Do We Steer Clear of VITL?
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 10.3 percentage points
- Earnings per share fell by 17.2% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable
- 13.6 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position
At $9.25 per share, Vital Farms trades at 14.8x forward EV-to-EBITDA. To fully understand why you should be careful with VITL, check out our full research report (it’s free).
Two stocks to watch:
Coursera (COUR)
Market cap: $1.23 billion
Founded by two Stanford University computer science professors, Coursera (NYSE: COUR) is an online learning platform that offers courses, specializations, and degrees from top universities and organizations around the world.
Why Does COUR Stand Out?
- Remarkable 20.6% revenue growth over the last three years demonstrates its ability to capture significant market share
- EBITDA profits increased over the last few years as the company gained some leverage on its fixed costs and became more efficient
- Earnings per share have massively outperformed its peers over the last three years, increasing by 94.6% annually
Coursera’s stock price of $4.26 implies a valuation ratio of 2.3x forward EV/EBITDA. Is now a good time to buy? See for yourself in our full research report, it’s free.
Limbach (LMB)
Market cap: $613.8 million
Established in 1901, Limbach (NASDAQ: LMB) provides integrated building systems solutions, including mechanical, electrical, and plumbing services.
Why Is LMB a Good Business?
- Impressive 15.6% annual revenue growth over the last two years indicates it’s winning market share this cycle
- Incremental sales significantly boosted profitability as its annual earnings per share growth of 20% over the last two years outstripped its revenue performance
- Market-beating returns on capital illustrate that management has a knack for investing in profitable ventures, and its returns are growing as it capitalizes on even better market opportunities
Limbach is trading at $51.55 per share, or 12x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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