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.
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 deliver strong gains and two that may face some trouble.
Two stocks to sell:
Caleres (CAL)
Market cap: $507.6 million
The owner of Dr. Scholl's, Caleres (NYSE: CAL) is a footwear company offering a range of styles.
Why Do We Think CAL Will Underperform?
- Lackluster 2.4% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Caleres’s stock price of $14.95 implies a valuation ratio of 6.8x forward P/E. Dive into our free research report to see why there are better opportunities than CAL.
Core Laboratories (CLB)
Market cap: $442.2 million
With roots dating back to the first commercial oil boom, Core Laboratories (NYSE: CLB) analyzes rock and fluid samples from oil and gas reservoirs to help energy companies optimize production and recovery.
Why Do We Avoid CLB?
- 2.4% annual revenue growth over the last five years was slower than its energy upstream and integrated energy peers
- Smaller revenue base of $516.7 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Costly operations and weak unit economics result in an inferior gross margin of 20.2% that must be offset through higher production volumes
At $9.67 per share, Core Laboratories trades at 14.2x forward P/E. Check out our free in-depth research report to learn more about why CLB doesn’t pass our bar.
One stock to buy:
Happen Bank (HAPN)
Market cap: $1.92 billion
Pioneering peer-to-peer lending in the US before evolving into a digital bank, Happen Bank (NASDAQ: HAPN) operates a marketplace that connects borrowers with lenders, offering personal loans, auto refinancing, and banking services.
Why Should You Buy HAPN?
- Impressive 17.6% annual revenue growth over the last two years indicates it’s winning market share this cycle
- Incremental sales significantly boosted profitability as its annual earnings per share growth of 96.5% over the last two years outstripped its revenue performance
- Management team has demonstrated it can invest in profitable ventures through its 12.1% five-year return on equity
Happen Bank is trading at $16.39 per share, or 7.2x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
Stocks we like even more
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