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 be the next big thing and two that may face some trouble.
Two Stocks to Sell:
Quanex (NX)
Market Cap: $768.7 million
Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.
Why Are We Cautious 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
- Revenue growth over the past two years was nullified by the company’s new share issuances as its earnings per share fell by 20.1% annually
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Quanex is trading at $17.78 per share, or 8.7x forward P/E. Read our free research report to see why you should think twice about including NX in your portfolio.
Valley National Bank (VLY)
Market Cap: $7.99 billion
Tracing its roots back to 1927 during the economic boom before the Great Depression, Valley National Bancorp (NASDAQGS:VLY) operates Valley National Bank, providing commercial, consumer, and wealth management banking services across several states.
Why Are We Out on VLY?
- Net interest income trends were unexciting over the last five years as its 9.6% annual growth was below the typical banking firm
- Net interest margin of 3% is well below other banks, signaling its loans aren’t very profitable
- Annual earnings per share growth of 1.5% underperformed its revenue over the last five years, showing its incremental sales were less profitable
Valley National Bank’s stock price of $14.61 implies a valuation ratio of 1x forward P/B. If you’re considering VLY for your portfolio, see our FREE research report to learn more.
One Stock to Buy:
Nextpower (NXT)
Market Cap: $17.98 billion
With its technology playing a key role in the massive 1.2 gigawatt Noor Abu Dhabi solar farm project, Nextpower (NASDAQ: NXT) is a provider of solar tracker systems that help solar panels follow the sun.
Why Are We Backing NXT?
- Market share has increased this cycle as its 19.3% annual revenue growth over the last two years was exceptional
- Free cash flow margin grew by 25.3 percentage points over the last five years, giving the company more chips to play with
- Returns on capital are growing as management capitalizes on its market opportunities
At $120.50 per share, Nextpower trades at 25.9x forward P/E. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More
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