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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here is one Russell 2000 stock that could deliver strong gains and two that may face some trouble.
Two Stocks to Sell:
Novanta (NOVT)
Market Cap: $4.51 billion
Originally a pioneer in the laser scanning industry during the late 1960s, Novanta (NASDAQ: NOVT) offers medicine and manufacturing technology to the medical, life sciences, and manufacturing industries.
Why Is NOVT Not Exciting?
- Annual revenue growth of 5.5% over the last two years was below our standards for the industrials sector
- Annual earnings per share growth of 4.2% underperformed its revenue over the last two years, showing its incremental sales were less profitable
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.6 percentage points
Novanta’s stock price of $125.93 implies a valuation ratio of 34.6x forward P/E. Dive into our free research report to see why there are better opportunities than NOVT.
Methode Electronics (MEI)
Market Cap: $208 million
Founded in 1946, Methode Electronics (NYSE: MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).
Why Is MEI Risky?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Methode Electronics is trading at $5.89 per share, or 6.2x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why MEI doesn’t pass our bar.
One Stock to Buy:
Coastal Financial (CCB)
Market Cap: $1.20 billion
Pioneering the intersection of traditional banking and financial technology in the Pacific Northwest, Coastal Financial (NASDAQ: CCB) operates as a bank holding company that provides traditional banking services and Banking-as-a-Service (BaaS) solutions to consumers and businesses.
Why Will CCB Beat the Market?
- Impressive 40.1% annual net interest income growth over the last five years indicates it’s winning market share this cycle
- Differentiated product suite results in a Strong performance of its loan book leads to a High-yielding loan book and low cost of funds result in a best-in-class net interest margin of 7.1%
- Earnings per share grew by 19.6% annually over the last five years and trumped its peers
At $79.00 per share, Coastal Financial trades at 2.1x forward P/B. Is now the right time to buy? Find out in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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