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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here is one Russell 2000 stock that could be a breakout winner and two best left off your watchlist.
Two Stocks to Sell:
Q2 Holdings (QTWO)
Market Cap: $4.79 billion
With a platform powering digital services for approximately 25 million account holders across America, Q2 Holdings (NYSE: QTWO) provides cloud-based digital solutions that help financial institutions, fintechs, and alternative finance companies deliver modern banking experiences to their customers.
Why Are We Cautious About QTWO?
- Average ARR growth of 12% over the last year has disappointed, suggesting it’s had a hard time winning long-term deals and renewals
- Sky-high servicing costs result in an inferior gross margin of 52.6% that must be offset through increased usage
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 3.3 percentage points
Q2 Holdings is trading at $76 per share, or 6.5x forward price-to-sales. Read our free research report to see why you should think twice about including QTWO in your portfolio.
Lovesac (LOVE)
Market Cap: $259.3 million
Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.
Why Is LOVE Not Exciting?
- Muted 1.6% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.6% for the last two years
- Diminishing returns on capital suggest its earlier profit pools are drying up
Lovesac’s stock price of $17.73 implies a valuation ratio of 22.5x forward P/E. If you’re considering LOVE for your portfolio, see our FREE research report to learn more.
One Stock to Buy:
Cal-Maine (CALM)
Market Cap: $4.70 billion
Known for brands such as Egg-Land’s Best and Land O’ Lakes, Cal-Maine (NASDAQ: CALM) produces, packages, and distributes eggs.
Why Are We Backing CALM?
- Impressive 33.9% annual revenue growth over the last three years indicates it’s winning market share
- Incremental sales over the last three years have been highly profitable as its earnings per share increased by 110% annually, topping its revenue gains
- Strong free cash flow margin of 20.8% enables it to reinvest or return capital consistently, and its recently improved profitability means it has even more resources to invest or distribute
At $97.80 per share, Cal-Maine trades at 6.9x forward P/E. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
High-Quality Stocks for All Market Conditions
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