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 best left off your watchlist.
Two Stocks to Sell:
Upstart (UPST)
Market Cap: $4.85 billion
Using over 2,500 data variables and trained on nearly 82 million repayment events, Upstart (NASDAQ: UPST) is an AI-powered lending platform that uses machine learning to help banks and credit unions more accurately assess borrower risk for personal loans, auto loans, and home equity lines of credit.
Why Are We Wary of UPST?
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Upstart’s stock price of $50.65 implies a valuation ratio of 4.3x forward price-to-sales. To fully understand why you should be careful with UPST, check out our full research report (it’s free for active Edge members).
Zumiez (ZUMZ)
Market Cap: $370.9 million
With store associates called “Zumiez Stash Members”, Zumiez (NASDAQ: ZUMZ) is a specialty retailer of street and skate apparel, footwear, and accessories.
Why Do We Avoid ZUMZ?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Subscale operations are evident in its revenue base of $900.3 million, meaning it has fewer distribution channels than its larger rivals
- Historical operating margin losses point to an inefficient cost structure
At $21.75 per share, Zumiez trades at 41.6x forward P/E. Dive into our free research report to see why there are better opportunities than ZUMZ.
One Stock to Watch:
Vita Coco (COCO)
Market Cap: $2.32 billion
Founded in 2004 followed by a 2021 IPO, The Vita Coco Company (NASDAQ: COCO) offers coconut water products that are a natural way to quench thirst.
Why Should COCO Be on Your Watchlist?
- Products are seeing elevated demand as its unit sales averaged 7.8% growth over the past two years
- Earnings growth has massively outpaced its peers over the last three years as its EPS has compounded at 195% annually
- ROIC punches in at 47.7%, illustrating management’s expertise in identifying profitable investments, and its rising returns show it’s making even more lucrative bets
Vita Coco is trading at $41 per share, or 32.5x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.
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