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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here is one Russell 2000 stock that could be a breakout winner and two that may face some trouble.
Two Stocks to Sell:
The Cheesecake Factory (CAKE)
Market Cap: $3.73 billion
Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ: CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.
Why Does CAKE Give Us Pause?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Estimated sales growth of 4.7% for the next 12 months implies demand will slow from its seven-year trend
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $73.64 per share, The Cheesecake Factory trades at 18.5x forward P/E. Dive into our free research report to see why there are better opportunities than CAKE.
Shoals (SHLS)
Market Cap: $1.66 billion
Started in Huntsville, Alabama, Shoals (NASDAQ: SHLS) designs and manufactures products that make solar energy systems work more efficiently.
Why Does SHLS Worry Us?
- Muted 6.2% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Free cash flow margin dropped by 7.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Shoals’s stock price of $10.30 implies a valuation ratio of 22.8x forward P/E. To fully understand why you should be careful with SHLS, check out our full research report (it’s free).
One Stock to Buy:
Federal Signal (FSS)
Market Cap: $6.73 billion
Developing sirens that warned of air raid attacks or fallout during the Cold War, Federal Signal (NYSE: FSS) provides safety and emergency equipment for government agencies, municipalities, and industrial companies.
Why Is FSS a Top Pick?
- Annual revenue growth of 15.3% over the past two years was outstanding, reflecting market share gains this cycle
- Incremental sales significantly boosted profitability as its annual earnings per share growth of 29.8% over the last two years outstripped its revenue performance
- Free cash flow margin jumped by 11.1 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
Federal Signal is trading at $110.51 per share, or 21.7x forward P/E. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More
ONE MORE THING: Top 5 Growth Stocks. The biggest stock winners almost always had one thing in common before they ran. Revenue growing like crazy. Meta. CrowdStrike. Broadcom. Our AI flagged all three. They returned 315%, 314%, and 455%, respectively.
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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.
