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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here is one Russell 2000 stock that could deliver strong gains and two best left off your watchlist.
Two Stocks to Sell:
Scholastic (SCHL)
Market Cap: $659.4 million
Creator of the legendary Scholastic Book Fair, Scholastic (NASDAQ: SCHL) is an international company specializing in children's publishing, education, and media services.
Why Do We Steer Clear of SCHL?
- 4% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Projected 25.1 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
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Scholastic’s stock price of $34.97 implies a valuation ratio of 20.3x forward P/E. To fully understand why you should be careful with SCHL, check out our full research report (it’s free).
Peabody Energy (BTU)
Market Cap: $3.32 billion
Beginning with a single wagon hauling coal in Illinois back when Grover Cleveland was president, Peabody Energy (NYSE: BTU) mines coal used by electricity generators and steel manufacturers.
Why Do We Pass on BTU?
- Annual sales declines of 1.8% for the past ten years show its products and services struggled to connect with the market during this cycle
- Costly operations and weak unit economics result in an inferior gross margin of 24.3% that must be offset through higher production volumes
- Day-to-day expenses have swelled relative to revenue over the last five years as its EBITDA margin fell by 33.3 percentage points
At $27.27 per share, Peabody Energy trades at 26.4x forward P/E. Dive into our free research report to see why there are better opportunities than BTU.
One Stock to Watch:
Mercury General (MCY)
Market Cap: $5.57 billion
Founded in 1961 and maintaining a network of over 6,300 independent agents across the country, Mercury General (NYSE: MCY) is an insurance company that primarily sells automobile insurance policies through independent agents in 11 states, with a strong focus on California.
Why Are We Fans of MCY?
- Net premiums earned expanded by 11.9% annually over the last two years, demonstrating exceptional market penetration this cycle
- Additional sales over the last two years increased its profitability as the 87% annual growth in its earnings per share outpaced its revenue
- Annual book value per share growth of 31.1% over the last two years was superb and indicates its capital strength increased during this cycle
Mercury General is trading at $100.55 per share, or 8.5x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI is taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
Our AI system flagged Palantir before it ran 1,662% between October 2022 and February 2026. AppLovin before it ran 753% between February 2024 and February 2026. Nvidia before it ran 1,178% between January 2023 and February 2026. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+214% between June 2020 and June 2025). Find your next big winner with StockStory today.
