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 is one Russell 2000 stock that could deliver strong gains and two best left off your watchlist.
Two Stocks to Sell:
Box (BOX)
Market Cap: $4.63 billion
Founded in 2005 by Aaron Levie and Dylan Smith, Box (NYSE: BOX) provides organizations with software to securely store, share and collaborate around work documents in the cloud.
Why Does BOX Fall Short?
- Muted 6.6% annual revenue growth over the last three years shows its demand lagged behind its software peers
- Anticipated sales growth of 7.9% for the next year implies demand will be shaky
- Free cash flow margin is forecasted to shrink by 1.5 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
Box’s stock price of $32.14 implies a valuation ratio of 4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than BOX.
Winnebago (WGO)
Market Cap: $835.6 million
Created to provide high-quality, affordable RVs to the post-war American family, Winnebago (NYSE: WGO) is a manufacturer of recreational vehicles, providing a range of motorhomes, travel trailers, and fifth-wheel products for outdoor and adventure lifestyles.
Why Do We Steer Clear of WGO?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 16.1% annually over the last two years
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Winnebago is trading at $29.81 per share, or 10.6x forward P/E. Check out our free in-depth research report to learn more about why WGO doesn’t pass our bar.
One Stock to Watch:
Vita Coco (COCO)
Market Cap: $1.92 billion
Founded in 2004 followed by a 2021 IPO, The Vita Coco Company (NASDAQ: COCO) offers coconut water products that are a natural way to quench thirst.
Why Is COCO Interesting?
- Products are reaching more households as its unit sales averaged 7.8% growth over the past two years
- Earnings per share grew by 195% annually over the last three years and trumped its peers
- ROIC punches in at 47.7%, illustrating management’s expertise in identifying profitable investments, and its returns are climbing as it finds even more attractive growth opportunities
At $34.21 per share, Vita Coco trades at 26.2x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More
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