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 be the next big thing and two best left off your watchlist.

Two Stocks to Sell:

Stitch Fix (SFIX)

Market Cap: $544.6 million

One of the original subscription box companies, Stitch Fix (NASDAQ: SFIX) is an online personal styling and fashion service that curates personalized clothing selections for customers.

Why Should You Sell SFIX?

1. Number of active clients has disappointed over the past two years, indicating weak demand for its offerings
2. Poor expense management has led to operating margin losses
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

At $4.13 per share, Stitch Fix trades at 15.2x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SFIX in your portfolio.

Lindsay (LNN)

Market Cap: $1.15 billion

A pioneer in the field of center pivot and lateral move irrigation, Lindsay (NYSE: LNN) provides a variety of proprietary water management and road infrastructure products and services.

Why Are We Wary of LNN?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Projected sales for the next 12 months are flat and suggest demand will be subdued
3. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 1.7% annually

Lindsay’s stock price of $106.58 implies a valuation ratio of 18.2x forward P/E. Dive into our free research report to see why there are better opportunities than LNN.

One Stock to Buy:

Magnite (MGNI)

Market Cap: $1.92 billion

Born from the 2020 merger of Rubicon Project and Telaria, Magnite (NASDAQ: MGNI) operates the world's largest independent sell-side advertising platform that automates the buying and selling of digital advertising inventory across all channels and formats.

Why Is MGNI a Top Pick?

1. Annual revenue growth of 30.2% over the last five years was superb and indicates its market share increased during this cycle
2. Incremental sales over the last two years have been highly profitable as its earnings per share increased by 32.5% annually, topping its revenue gains
3. Strong free cash flow margin of 24.8% enables it to reinvest or return capital consistently, and its rising cash conversion increases its margin of safety

Magnite is trading at $13.36 per share, or 13.9x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.

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