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. That said, here are two Russell 2000 stocks that could deliver strong gains and one that may struggle to keep up.
One Stock to Sell:
Strategic Education (STRA)
Market Cap: $1.83 billion
Formed through the merger of Strayer Education and Capella Education in 2018, Strategic Education (NASDAQ: STRA) is a career-focused higher education provider.
Why Is STRA Risky?
- Sluggish trends in its international students suggest customers aren’t adopting its solutions as quickly as the company hoped
- Earnings per share fell by 1.7% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Free cash flow margin is expected to remain in place over the coming year
Strategic Education is trading at $81.76 per share, or 12x forward P/E. Read our free research report to see why you should think twice about including STRA in your portfolio.
Two Stocks to Watch:
Northwest Pipe (NWPX)
Market Cap: $753.3 million
Playing a large role in the Integrated Pipeline (IPL) project in Texas to deliver ~350 million gallons of water per day, Northwest Pipe (NASDAQ: NWPX) is a manufacturer of pipeline systems for water infrastructure.
Why Do We Like NWPX?
- Annual revenue growth of 13% over the past five years was outstanding, reflecting market share gains this cycle
- Performance over the past two years was turbocharged by share buybacks, which enabled its earnings per share to grow faster than its revenue
- Free cash flow margin increased by 14.7 percentage points over the last five years, giving the company more capital to invest or return to shareholders
Northwest Pipe’s stock price of $78.79 implies a valuation ratio of 18.5x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
NMI Holdings (NMIH)
Market Cap: $2.83 billion
Founded in the aftermath of the 2008 housing crisis to bring new capacity to the mortgage insurance market, NMI Holdings (NASDAQ: NMIH) provides mortgage insurance that protects lenders against losses when homebuyers default on their mortgage loans.
Why Are We Fans of NMIH?
- Pre-tax profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
- Annual book value per share growth of 16.1% over the past five years was outstanding, reflecting strong capital accumulation this cycle
- ROE punches in at 17.4%, illustrating management’s expertise in identifying profitable investments
At $37.20 per share, NMI Holdings trades at 0.9x forward P/B. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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