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 be the next big thing and two that may face some trouble.
Two Stocks to Sell:
1-800-FLOWERS (FLWS)
Market Cap: $257.7 million
Founded in 1976, 1-800-FLOWERS (NASDAQ: FLWS) is an online retailer of flowers, gifts, and gourmet foods, serving customers globally.
Why Do We Pass on FLWS?
- Annual revenue declines of 5.5% over the last five years indicate problems with its market positioning
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $4.02 per share, 1-800-FLOWERS trades at 0.2x forward price-to-sales. If you’re considering FLWS for your portfolio, see our FREE research report to learn more.
Quanex (NX)
Market Cap: $897 million
Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.
Why Do We Think Twice About NX?
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 19.5 percentage points
- Issuance of new shares over the last two years caused its earnings per share to fall by 20.1% annually while its revenue grew
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Quanex is trading at $19.70 per share, or 10.9x forward P/E. Check out our free in-depth research report to learn more about why NX doesn’t pass our bar.
One Stock to Buy:
Clover Health (CLOV)
Market Cap: $2.18 billion
Founded in 2014 to improve healthcare for America's seniors through technology, Clover Health (NASDAQ: CLOV) provides Medicare Advantage plans for seniors with a focus on affordable care and uses its proprietary Clover Assistant software to help physicians manage patient care.
Why Is CLOV a Good Business?
- Annual revenue growth of 36.9% over the past two years was outstanding, reflecting market share gains this cycle
- Earnings per share grew by 15.2% annually over the last five years and trumped its peers
- Free cash flow turned positive over the last five years, indicating the company has passed a significant test
Clover Health’s stock price of $4.12 implies a valuation ratio of 28.1x forward P/E. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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