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. That said, here is one Russell 2000 stock that could deliver strong gains and two that may struggle to keep up.
Two Stocks to Sell:
Five9 (FIVN)
Market Cap: $1.13 billion
Taking its name from the "five nines" (99.999%) standard for optimal service reliability in telecommunications, Five9 (NASDAQ: FIVN) provides cloud-based software that enables businesses to run their contact centers with tools for customer service, sales, and marketing across multiple communication channels.
Why Do We Pass on FIVN?
- Average billings growth of 9.1% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales growth of 9.3% for the next 12 months implies demand will slow from its two-year trend
- Gross margin of 55.2% is way below its competitors, leaving less money to invest in areas like marketing and R&D
At $14.79 per share, Five9 trades at 1x forward price-to-sales. Dive into our free research report to see why there are better opportunities than FIVN.
Polaris (PII)
Market Cap: $3.03 billion
Founded in 1954, Polaris (NYSE: PII) designs and manufactures high-performance off-road vehicles, snowmobiles, and motorcycles.
Why Should You Sell PII?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Projected 4.7 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Polaris is trading at $53.27 per share, or 32.7x forward P/E. If you’re considering PII for your portfolio, see our FREE research report to learn more.
One Stock to Watch:
Thermon (THR)
Market Cap: $1.61 billion
Creating the first packaged tracing systems, Thermon (NYSE: THR) is a leading provider of engineered industrial process heating solutions for process industries.
Why Does THR Stand Out?
- Market share has increased this cycle as its 12.4% annual revenue growth over the last five years was exceptional
- Operating profits and efficiency rose over the last five years as it benefited from some fixed cost leverage
- Performance over the past five years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 46.1% outpaced its revenue gains
Thermon’s stock price of $48.92 implies a valuation ratio of 23.5x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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