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. Keeping that in mind, here is one Russell 2000 stock that could be a breakout winner and two that may struggle to keep up.
Two Stocks to Sell:
Stitch Fix (SFIX)
Market Cap: $505.7 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 Do We Think SFIX Will Underperform?
- Performance surrounding its active clients has lagged its peers
- Low free cash flow margin of 1.1% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $3.80 per share, Stitch Fix trades at 7.8x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SFIX in your portfolio.
L.B. Foster (FSTR)
Market Cap: $438.5 million
Founded with a $2,500 loan, L.B. Foster (NASDAQ: FSTR) is a provider of products and services for the transportation and energy infrastructure sectors, including rail products, construction materials, and coating solutions.
Why Do We Think Twice About FSTR?
- Average backlog growth of 1.7% over the past two years was mediocre and suggests fewer customers signed long-term contracts
- Projected sales decline of 2.1% for the next 12 months points to an even tougher demand environment ahead
- ROIC of 3.8% reflects management’s challenges in identifying attractive investment opportunities
L.B. Foster’s stock price of $41.94 implies a valuation ratio of 28.3x forward P/E. Dive into our free research report to see why there are better opportunities than FSTR.
One Stock to Buy:
Skyward Specialty Insurance (SKWD)
Market Cap: $2.40 billion
Founded in 2006 to serve markets where standard insurance coverage falls short, Skyward Specialty Insurance (NASDAQ: SKWD) provides customized commercial property, casualty, and health insurance solutions for underserved or specialized market niches.
Why Are We Bullish on SKWD?
- Strong 27.6% annualized net premiums earned expansion over the last two years shows it’s capturing market share this cycle
- Expected revenue growth of 25.3% for the next year suggests its market share will rise
- Annual book value per share growth of 26% over the past two years was outstanding, reflecting strong capital accumulation this cycle
Skyward Specialty Insurance is trading at $59.22 per share, or 2x forward P/B. Is now the right time to buy? Find out in our full research report, it’s free.
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