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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. 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:
Rush Street Interactive (RSI)
Market Cap: $3.05 billion
Specializing in online casino gaming and sports betting, Rush Street Interactive (NYSE: RSI) is an operator of digital gaming platforms.
Why Do We Pass on RSI?
- 28.5% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Operating margin of 6.9% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Free cash flow margin is expected to increase by 1.2 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
At $30.38 per share, Rush Street Interactive trades at 44.2x forward P/E. Dive into our free research report to see why there are better opportunities than RSI.
Nelnet (NNI)
Market Cap: $4.62 billion
Starting as a student loan servicer in the 1970s and evolving through the changing landscape of education finance, Nelnet (NYSE: NNI) provides student loan servicing, education technology, payment processing, and banking services while managing a portfolio of education loans.
Why Are We Cautious About NNI?
- Muted 5.5% annual revenue growth over the last five years shows its demand lagged behind its financials peers
- ROE of 8.4% reflects management’s challenges in identifying attractive investment opportunities
Nelnet’s stock price of $133.51 implies a valuation ratio of 2.8x forward price-to-sales. To fully understand why you should be careful with NNI, check out our full research report (it’s free).
One Stock to Buy:
Clover Health (CLOV)
Market Cap: $2.58 billion
Founded in 2014 to improve healthcare for America's seniors through technology, Clover Health (NASDAQ: CLOV) provides Medicare Advantage plans for seniors with a focus on affordable care and uses its proprietary Clover Assistant software to help physicians manage patient care.
Why Do We Love CLOV?
- Market share has increased this cycle as its 31.2% annual revenue growth over the last two years was exceptional
- Adjusted operating profits and efficiency rose over the last five years as it benefited from some fixed cost leverage
- Free cash flow flipped to positive over the last five years, indicating the company has passed a significant test
Clover Health is trading at $5.19 per share, or 57.9x forward P/E. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
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