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:
Energizer (ENR)
Market Cap: $1.19 billion
Masterminds behind the viral Energizer Bunny mascot, Energizer (NYSE: ENR) is one of the world's largest manufacturers of batteries.
Why Does ENR Give Us Pause?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Anticipated sales growth of 2.4% for the next year implies demand will be shaky
- High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $17.54 per share, Energizer trades at 5.2x forward P/E. Read our free research report to see why you should think twice about including ENR in your portfolio.
CoreCivic (CXW)
Market Cap: $1.71 billion
Originally founded in 1983 as the first private prison company in the United States, CoreCivic (NYSE: CXW) operates correctional facilities, detention centers, and residential reentry programs for government agencies across the United States.
Why Is CXW Not Exciting?
- Annual revenue growth of 3% over the last five years was below our standards for the business services sector
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.3 percentage points
- ROIC of 5.9% reflects management’s challenges in identifying attractive investment opportunities
CoreCivic is trading at $17.47 per share, or 10.8x forward P/E. To fully understand why you should be careful with CXW, check out our full research report (it’s free).
One Stock to Buy:
Palomar Holdings (PLMR)
Market Cap: $3.2 billion
Founded in 2013 to fill gaps in catastrophe insurance markets, Palomar Holdings (NASDAQ: PLMR) is a specialty insurance provider that offers property and casualty insurance products in underserved markets, with a focus on earthquake coverage.
Why Will PLMR Beat the Market?
- Market penetration was impressive this cycle as its net premiums earned expanded by 52.3% annually over the last two years
- Annual book value per share growth of 36.7% over the last two years was superb and indicates its capital strength increased during this cycle
- Notable projected book value per share growth of 26.4% for the next 12 months hints at strong capital generation
Palomar Holdings’s stock price of $119.50 implies a valuation ratio of 2.8x forward P/B. Is now the right time to buy? See for yourself in our full research report, it’s free.
Stocks We Like Even More
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