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. Keeping that in mind, here is one Russell 2000 stock that could deliver strong gains and two best left off your watchlist.
Two Stocks to Sell:
Select Medical (SEM)
Market Cap: $2.04 billion
With a nationwide network spanning 46 states and over 2,700 healthcare facilities, Select Medical (NYSE: SEM) operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers across the United States.
Why Does SEM Give Us Pause?
- Declining admissions over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $16.45 per share, Select Medical trades at 12.5x forward P/E. Read our free research report to see why you should think twice about including SEM in your portfolio.
Azenta (AZTA)
Market Cap: $808 million
Serving as the guardian of some of medicine's most valuable materials, Azenta (NASDAQ: AZTA) provides biological sample management, storage, and genomic services that help pharmaceutical and biotechnology companies preserve and analyze critical research materials.
Why Should You Dump AZTA?
- Annual sales declines of 1.6% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have contracted by 24.8% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Cash-burning history makes us doubt the long-term viability of its business model
Azenta is trading at $17.78 per share, or 30.8x forward P/E. If you’re considering AZTA for your portfolio, see our FREE research report to learn more.
One Stock to Buy:
Talos Energy (TALO)
Market Cap: $2.56 billion
Operating its own deepwater production facilities with names like Tarantula, Pompano, and Brutus, Talos Energy (NYSE: TALO) explores for and produces oil and natural gas from offshore wells in the Gulf of Mexico and offshore Mexico.
Why Is TALO a Top Pick?
- Impressive 16.9% annual revenue growth over the last eight years indicates it’s winning market share this cycle
- Attractive asset base leads to wonderful unit economics and a stellar gross margin of 72.4%
- TALO is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
Talos Energy’s stock price of $15.35 implies a valuation ratio of 147.4x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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