The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.
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:
Lovesac (LOVE)
Market Cap: $228.8 million
Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.
Why Should You Dump LOVE?
- Annual revenue growth of 16.8% over the last five years was below our standards for the consumer discretionary sector
- Free cash flow margin is forecasted to shrink by 2.5 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Lovesac is trading at $15.25 per share, or 8.5x forward EV-to-EBITDA. To fully understand why you should be careful with LOVE, check out our full research report (it’s free).
Universal Logistics (ULH)
Market Cap: $371.3 million
Founded in 1932, Universal Logistics (NASDAQ: ULH) is a provider of customized transportation and logistics solutions operating throughout the United States and in Mexico, Canada, and Colombia.
Why Do We Steer Clear of ULH?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.2% annually over the last two years
- Diminishing returns on capital suggest its earlier profit pools are drying up
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Universal Logistics’s stock price of $14.09 implies a valuation ratio of 16.4x forward P/E. Dive into our free research report to see why there are better opportunities than ULH.
One Stock to Buy:
AAR (AIR)
Market Cap: $4.22 billion
The first third-party MRO approved by the FAA for Safety Management System Requirements, AAR (NYSE: AIR) is a provider of aircraft maintenance services
Why Will AIR Outperform?
- Market share has increased this cycle as its 18.9% annual revenue growth over the last two years was exceptional
- Projected revenue growth of 12.7% for the next 12 months suggests its momentum from the last two years will persist
- Earnings per share grew by 19.5% annually over the last two years, massively outpacing its peers
At $107.35 per share, AAR trades at 19x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.
