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.
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. Keeping that in mind, here is one Russell 2000 stock that could be the next big thing and two that may struggle to keep up.
Two Stocks to Sell:
BJ's (BJRI)
Market Cap: $764.2 million
Founded in 1978 in California, BJ’s Restaurants (NASDAQ: BJRI) is a chain of restaurants whose menu features classic American dishes, often with a twist.
Why Do We Think BJRI Will Underperform?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Gross margin of 14.7% reflects the bad unit economics inherent in most restaurant businesses
- Underwhelming 3% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $34.54 per share, BJ's trades at 15.6x forward P/E. If you’re considering BJRI for your portfolio, see our FREE research report to learn more.
Oxford Industries (OXM)
Market Cap: $542.5 million
The parent company of Tommy Bahama, Oxford Industries (NYSE: OXM) is a lifestyle fashion conglomerate with brands that embody outdoor happiness.
Why Is OXM Risky?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Anticipated sales growth of 1.4% for the next year implies demand will be shaky
- Eroding returns on capital suggest its historical profit centers are aging
Oxford Industries is trading at $36.49 per share, or 11.1x forward P/E. Check out our free in-depth research report to learn more about why OXM doesn’t pass our bar.
One Stock to Buy:
Planet Labs (PL)
Market Cap: $3.91 billion
Pioneering the concept of "agile aerospace" with hundreds of small but powerful satellites, Planet Labs (NYSE: PL) operates the world's largest fleet of Earth observation satellites, capturing daily images of our planet to provide insights on deforestation, agriculture, and climate change.
Why Should You Buy PL?
- Market share has increased this cycle as its 22.3% annual revenue growth over the last five years was exceptional
- Free cash flow profile has moved into positive territory over the last five years, showing the company has crossed a key inflection point
- Rising returns on capital show the company is starting to reap the benefits of its past investments
Planet Labs’s stock price of $12.60 implies a valuation ratio of 12.5x forward price-to-sales. Is now a good time to buy? Find out in our full research report, it’s free for active Edge members.
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