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. 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:
Central Garden & Pet (CENT)
Market Cap: $2.01 billion
Enhancing the lives of both pets and homeowners, Central Garden & Pet (NASDAQ: CENT) is a leading producer and distributor of essential products for pet care, lawn and garden maintenance, and pest control.
Why Does CENT Give Us Pause?
- Products have few die-hard fans as sales have declined by 2.2% annually over the last three years
- Projected sales growth of 1.1% for the next 12 months suggests sluggish demand
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging
At $35.81 per share, Central Garden & Pet trades at 12.7x forward P/E. To fully understand why you should be careful with CENT, check out our full research report (it’s free).
AMC Entertainment (AMC)
Market Cap: $652.7 million
With a profile that was raised due to meme stock mania beginning in 2021, AMC Entertainment (NYSE: AMC) operates movie theaters primarily in the US and Europe.
Why Do We Think Twice About AMC?
- Products and services fail to spark excitement with consumers, as seen in its flat sales over the last two years
- Cash-burning history makes us doubt the long-term viability of its business model
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
AMC Entertainment’s stock price of $1.11 implies a valuation ratio of 14.3x forward EV-to-EBITDA. If you’re considering AMC for your portfolio, see our FREE research report to learn more.
One Stock to Buy:
Cactus (WHD)
Market Cap: $3.29 billion
Named for the spiky wellhead equipment that reminded founders of desert cacti, Cactus (NYSE: WHD) manufactures wellheads, valves, and spoolable pipes used in drilling and producing oil and gas wells.
Why Will WHD Beat the Market?
- Annual revenue growth of 24.1% over the past nine years was outstanding, reflecting market share gains this cycle
- EBITDA profits and efficiency rose over the last five years as it benefited from some fixed cost leverage
- Robust free cash flow margin of 21% gives it many options for capital deployment
Cactus is trading at $47.79 per share, or 16.4x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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