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 deliver strong gains and one best left off your watchlist.
One Stock to Sell:
Inspired (INSE)
Market Cap: $225.9 million
Specializing in digital casino gaming, Inspired (NASDAQ: INSE) is a provider of gaming hardware, virtual sports platforms, and server-based gaming systems.
Why Are We Cautious About INSE?
- 1.1% annual revenue growth over the last two years was slower than its consumer discretionary peers
- Projected sales are flat for the next 12 months, implying demand will slow from its two-year trend
- Poor free cash flow margin of 1.8% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Inspired’s stock price of $8.39 implies a valuation ratio of 2.2x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including INSE in your portfolio.
Two Stocks to Watch:
Urban Outfitters (URBN)
Market Cap: $6.58 billion
Founded as a purveyor of vintage items, Urban Outfitters (NASDAQ: URBN) now largely sells new apparel and accessories to teens and young adults seeking on-trend fashion.
Why Are We Positive On URBN?
- Same-store sales growth averaged 4.2% over the past two years, showing it’s bringing new and repeat shoppers into its stores
- Demand will likely accelerate over the next 12 months as its forecasted revenue growth of 8.1% is above its six-year trend
- Earnings per share grew by 46.7% annually over the last five years and trumped its peers
Urban Outfitters is trading at $72.86 per share, or 16.4x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
Graham Corporation (GHM)
Market Cap: $527 million
Founded when its founder patented a unique design for a vacuum system used in the sugar refining process, Graham (NYSE: GHM) provides vacuum and heat transfer equipment for the energy, petrochemical, refining, and chemical sectors.
Why Will GHM Beat the Market?
- Sales pipeline is in good shape as its backlog averaged 21.7% growth over the past two years
- Operating margin expanded by 4.4 percentage points over the last five years as it scaled and became more efficient
- Additional sales over the last two years increased its profitability as the 145% annual growth in its earnings per share outpaced its revenue
At $48.01 per share, Graham Corporation trades at 27.6x forward EV-to-EBITDA. Is now a good time to buy? See for yourself in our full research report, it’s free.
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