Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. That said, here is one Russell 2000 stock that could be the next big thing and two best left off your watchlist.
Two Stocks to Sell:
Vestis (VSTS)
Market Cap: $709.3 million
Operating a network of more than 350 facilities with 3,300 delivery routes serving customers weekly, Vestis (NYSE: VSTS) provides uniform rentals, workplace supplies, and facility services to over 300,000 business locations across the United States and Canada.
Why Do We Think VSTS Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.5% annually over the last two years
- 9.8 percentage point decline in its free cash flow margin over the last four years reflects the company’s increased investments to defend its market position
- High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $5.38 per share, Vestis trades at 16.4x forward P/E. Dive into our free research report to see why there are better opportunities than VSTS.
Diebold Nixdorf (DBD)
Market Cap: $2.14 billion
With roots dating back to 1859 and a presence in over 100 countries, Diebold Nixdorf (NYSE: DBD) provides automated self-service technology, software, and services that help banks and retailers digitize their customer transactions.
Why Does DBD Worry Us?
- Annual sales declines of 1.8% for the past five years show its products and services struggled to connect with the market during this cycle
- Negative free cash flow raises questions about the return timeline for its investments
- Underwhelming 3% return on capital reflects management’s difficulties in finding profitable growth opportunities
Diebold Nixdorf is trading at $58.35 per share, or 13.7x forward P/E. Read our free research report to see why you should think twice about including DBD in your portfolio.
One Stock to Watch:
LegalZoom (LZ)
Market Cap: $1.85 billion
Founded by famous lawyer Robert Shapiro, LegalZoom (NASDAQ: LZ) offers online legal services and documentation assistance for individuals and businesses.
Why Does LZ Stand Out?
- Subscription Units have grown by 11.7% annually, allowing for more profitable cross-selling opportunities if it can build complementary products and features
- Share repurchases have amplified shareholder returns as its annual earnings per share growth of 177% exceeded its revenue gains over the last three years
- Free cash flow margin jumped by 14.9 percentage points over the last few years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
LegalZoom’s stock price of $10.35 implies a valuation ratio of 10.1x forward EV/EBITDA. Is now a good time to buy? See for yourself in our in-depth research report, it’s free for active Edge members.
High-Quality Stocks for All Market Conditions
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