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 best left off your watchlist.
Two Stocks to Sell:
Krispy Kreme (DNUT)
Market Cap: $522.2 million
Famous for its Original Glazed doughnuts and parent company of Insomnia Cookies, Krispy Kreme (NASDAQ: DNUT) is one of the most beloved and well-known fast-food chains in the world.
Why Are We Out on DNUT?
- Sales trends were unexciting over the last seven years as its 6.2% annual growth was below the typical restaurant company
- Negative free cash flow raises questions about the return timeline for its investments
- High net-debt-to-EBITDA ratio of 8× could force the company to raise capital on unfavorable terms if market conditions deteriorate
Krispy Kreme is trading at $2.98 per share, or 41.8x forward P/E. To fully understand why you should be careful with DNUT, check out our full research report (it’s free).
Surgery Partners (SGRY)
Market Cap: $1.77 billion
With more than 180 locations across 33 states serving as alternatives to traditional hospital settings, Surgery Partners (NASDAQ: SGRY) operates a national network of outpatient surgical facilities including ambulatory surgery centers and short-stay surgical hospitals.
Why Does SGRY Give Us Pause?
- Underwhelming unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Sales are projected to tank by 5.5% over the next 12 months as demand evaporates
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $13.64 per share, Surgery Partners trades at 52.7x forward P/E. Read our free research report to see why you should think twice about including SGRY in your portfolio.
One Stock to Watch:
CarGurus (CARG)
Market Cap: $2.60 billion
Bringing transparency to a sometimes opaque process, CarGurus (NASDAQ: CARG) is a digital marketplace where auto dealers can connect with potential customers and where car buyers can browse, purchase, and obtain financing.
Why Do We Like CARG?
- Superior platform functionality and low servicing costs lead to a best-in-class gross margin of 90.1%
- Earnings per share grew by 35.5% annually over the last three years, massively outpacing its peers
- CARG is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders, and its expanding margin gives it even more flexibility
CarGurus’s stock price of $29.23 implies a valuation ratio of 7.4x forward EV/EBITDA. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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