The Russell 2000 (^RUT) is packed with potential breakout stocks, thanks to its focus on smaller companies with high growth potential. However, smaller size also means these businesses often lack the resilience and financial flexibility of large-cap firms, making careful selection crucial.
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 is one Russell 2000 stock that could deliver strong gains and two that may face some trouble.
Two Stocks to Sell:
Clarus (CLAR)
Market Cap: $142.1 million
Initially a financial services business, Clarus (NASDAQ: CLAR) designs, manufactures, and distributes outdoor equipment and lifestyle products.
Why Should You Dump CLAR?
- Annual sales declines of 10.6% for the past two years show its products and services struggled to connect with the market
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $3.16 per share, Clarus trades at 22.8x forward P/E. To fully understand why you should be careful with CLAR, check out our full research report (it’s free).
Collegium Pharmaceutical (COLL)
Market Cap: $1.09 billion
Pioneering abuse-deterrent technology in a field plagued by addiction concerns, Collegium Pharmaceutical (NASDAQ: COLL) develops and markets specialty medications for treating moderate to severe pain, including abuse-deterrent opioid formulations.
Why Are We Wary of COLL?
- Modest revenue base of $707 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Free cash flow margin dropped by 2.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Diminishing returns on capital suggest its earlier profit pools are drying up
Collegium Pharmaceutical’s stock price of $34.60 implies a valuation ratio of 4.6x forward P/E. Check out our free in-depth research report to learn more about why COLL doesn’t pass our bar.
One Stock to Watch:
OFG Bancorp (OFG)
Market Cap: $1.99 billion
Originally founded in 1964 as a federal savings and loan institution, OFG Bancorp (NYSE: OFG) provides banking and financial services including commercial and consumer lending, wealth management, insurance, and trust services primarily in Puerto Rico and the U.S. Virgin Islands.
Why Are We Fans of OFG?
- Non-interest operating profits increased over the last four years as the firm gained some leverage on its fixed costs and became more efficient
- Share repurchases over the last two years enabled its annual earnings per share growth of 6.3% to outpace its revenue gains
- Balance sheet strength has increased this cycle as its 11.8% annual tangible book value per share growth over the last five years was exceptional
OFG Bancorp is trading at $44.60 per share, or 1.4x forward P/B. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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