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 deliver strong gains and two best left off your watchlist.
Two stocks to sell:
Neogen (NEOG)
Market cap: $2.64 billion
Founded in 1981 and operating at the intersection of food safety and animal health, Neogen (NASDAQ: NEOG) develops and manufactures diagnostic tests and related products to detect dangerous substances in food and pharmaceuticals for animal health.
Why Are We Bearish on NEOG?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.6% annually over the last two years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Neogen is trading at $12.11 per share, or 34.8x forward P/E. Check out our free in-depth research report to learn more about why NEOG doesn’t pass our bar.
Ibotta (IBTA)
Market cap: $1.40 billion
Originally launched as a way to make grocery shopping more rewarding for budget-conscious consumers, Ibotta (NYSE: IBTA) is a mobile shopping app that allows consumers to earn cash back on everyday purchases by completing tasks and submitting receipts.
Why Are We Wary of IBTA?
- Annual sales declines of 1.4% for the past two years show its products and services struggled to connect with the market during this cycle
- Modest revenue base of $357.7 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
Ibotta’s stock price of $61.00 implies a valuation ratio of 24.8x forward P/E. Read our free research report to see why you should think twice about including IBTA in your portfolio.
One stock to watch:
DHT Holdings (DHT)
Market cap: $3.86 billion
With each vessel capable of carrying roughly 2 million barrels of oil—enough to fill about 125 Olympic swimming pools—DHT Holdings (NYSE: DHT) operates very large crude carriers that transport crude oil across international routes for energy companies and traders.
Why Could DHT Be a Winner?
- Annual revenue growth of 6.4% over the last ten years was superb and indicates its market share increased during this cycle
- EBITDA profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
- Robust free cash flow margin of 28.8% gives it many options for capital deployment
At $23.91 per share, DHT Holdings trades at 3.7x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
High-quality stocks for all market conditions
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