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 a breakout winner and two that may face some trouble.
Two Stocks to Sell:
Grocery Outlet (GO)
Market Cap: $696.9 million
Due to its differentiated procurement and buying approach, Grocery Outlet (NASDAQ: GO) is a discount grocery store chain that offers substantial discounts on name-brand products.
Why Do We Steer Clear of GO?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 6.5 percentage points
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Grocery Outlet’s stock price of $7.07 implies a valuation ratio of 14.5x forward P/E. To fully understand why you should be careful with GO, check out our full research report (it’s free).
Novavax (NVAX)
Market Cap: $1.30 billion
Pioneering a nanoparticle technology that mimics the molecular structure of disease pathogens, Novavax (NASDAQ: NVAX) develops and commercializes protein-based vaccines for infectious diseases, with a primary focus on its COVID-19 vaccine and combination respiratory vaccine candidates.
Why Do We Think Twice About NVAX?
- Sales trends were unexciting over the last two years as its 6.9% annual growth was below the typical healthcare company
- Forecasted revenue decline of 66.2% for the upcoming 12 months implies demand will fall off a cliff
- 45.5 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Novavax is trading at $7.97 per share, or 3.4x forward price-to-sales. Check out our free in-depth research report to learn more about why NVAX doesn’t pass our bar.
One Stock to Watch:
FirstCash (FCFS)
Market Cap: $8.37 billion
Offering a financial lifeline to the unbanked and credit-constrained since 1988, FirstCash (NASDAQ: FCFS) operates pawn stores across the U.S. and Latin America while also providing retail point-of-sale payment solutions for credit-constrained consumers.
Why Is FCFS on Our Radar?
- Impressive 17.5% annual revenue growth over the last five years indicates it’s winning market share this cycle
- Performance over the past five years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 23.8% outpaced its revenue gains
- Acceptable return on equity suggests management generated shareholder value by investing in profitable projects
At $190.45 per share, FirstCash trades at 19x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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