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. Keeping that in mind, here is one Russell 2000 stock that could be the next big thing and two best left off your watchlist.

Two Stocks to Sell:

B&G Foods (BGS)

Market Cap: $343.1 million

Started as a small grocery store in New York City, B&G Foods (NYSE: BGS) is an American packaged foods company with a diverse portfolio of more than 50 brands.

Why Should You Dump BGS?

1. Products have few die-hard fans as sales have declined by 3.3% annually over the last three years
2. Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 30.7% annually, worse than its revenue
3. 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

B&G Foods’s stock price of $4.38 implies a valuation ratio of 6.1x forward P/E. Dive into our free research report to see why there are better opportunities than BGS.

PacBio (PACB)

Market Cap: $345.1 million

Pioneering what scientists call "HiFi long-read sequencing," recognized as Nature Methods' method of the year for 2022, Pacific Biosciences (NASDAQ: PACB) develops advanced DNA sequencing systems that enable scientists and researchers to analyze genomes with unprecedented accuracy and completeness.

Why Do We Pass on PACB?

1. 6.6% annual revenue growth over the last two years was slower than its healthcare peers
2. Free cash flow margin dropped by 29.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $1.13 per share, PacBio trades at 2.1x forward price-to-sales. To fully understand why you should be careful with PACB, check out our full research report (it’s free).

One Stock to Watch:

Yelp (YELP)

Market Cap: $2.59 billion

Founded by PayPal alumni Jeremy Stoppelman and Russel Simmons, Yelp (NYSE: YELP) is an online platform that helps people discover local businesses through crowd-sourced reviews.

Why Are We Positive On YELP?

1. Platform is difficult to replicate at scale and results in a best-in-class gross margin of 91.2%
2. Highly efficient business model is illustrated by its impressive 25.7% EBITDA margin, and its rise over the last few years was fueled by some leverage on its fixed costs
3. Share repurchases have amplified shareholder returns as its annual earnings per share growth of 24.7% exceeded its revenue gains over the last three years

Yelp is trading at $40.25 per share, or 7.5x forward EV/EBITDA. Is now the right time to buy? Find out in our full research report, it’s free.

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