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 deliver strong gains and two that may face some trouble.
Two Stocks to Sell:
Victoria's Secret (VSXY)
Market Cap: $6.26 billion
Spun off from L Brands in 2020, Victoria’s Secret (NYSE: VSXY) is an intimate clothing and beauty retailer that sells its own brands of lingerie, undergarments, and personal fragrances.
Why Does VSXY Fall Short?
- Annual revenue growth of 2.6% over the last three years was below our standards for the consumer retail sector
- Operating margin of 4.8% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Revenue growth over the past three years was nullified by the company’s new share issuances as its earnings per share fell by 6% annually
Victoria's Secret’s stock price of $76.78 implies a valuation ratio of 16.2x forward P/E. Read our free research report to see why you should think twice about including VSXY in your portfolio.
Proto Labs (PRLB)
Market Cap: $1.85 billion
Pioneering the concept of online quoting and manufacturing for custom prototypes and low-volume production parts, Proto Labs (NYSE: PRLB) offers injection molding, 3D printing, and sheet metal fabrication for manufacturers in various industries.
Why Do We Pass on PRLB?
- Muted 3.9% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Earnings per share have contracted by 2.9% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $76.44 per share, Proto Labs trades at 39.2x forward P/E. Dive into our free research report to see why there are better opportunities than PRLB.
One Stock to Buy:
Huron (HURN)
Market Cap: $1.62 billion
Founded in 2002 during a time of significant regulatory change in corporate America, Huron Consulting Group (NASDAQ: HURN) is a professional services company that helps organizations develop growth strategies, optimize operations, and implement digital transformation solutions.
Why Will HURN Outperform?
- Annual revenue growth of 15.9% over the past five years was outstanding, reflecting market share gains this cycle
- Share repurchases have amplified shareholder returns as its annual earnings per share growth of 22.1% exceeded its revenue gains over the last two years
- Free cash flow margin jumped by 6.7 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
Huron is trading at $97.16 per share, or 10.7x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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