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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. 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:
Fluence Energy (FLNC)
Market Cap: $1.45 billion
Pioneering the use of lithium-ion batteries for grid storage, Fluence (NASDAQ:FLNC) helps store renewable energy sources with battery systems.
Why Does FLNC Worry Us?
- Historically negative EPS casts doubt for cautious investors and clouds its long-term earnings prospects
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
At $10.16 per share, Fluence Energy trades at 188.8x forward P/E. Read our free research report to see why you should think twice about including FLNC in your portfolio.
Selective Insurance Group (SIGI)
Market Cap: $5.37 billion
Founded in 1926 during the early days of automobile insurance, Selective Insurance Group (NASDAQ:SIGI) is a property and casualty insurance company that sells commercial, personal, and excess and surplus lines insurance products through independent agents.
Why Does SIGI Fall Short?
- Estimated sales decline of 1.2% for the next 12 months implies a challenging demand environment
- Day-to-day expenses have swelled relative to revenue over the last five years as its pre-tax profit margin fell by 5.1 percentage points
- Incremental sales over the last five years were less profitable as its 4.3% annual earnings per share growth lagged its revenue gains
Selective Insurance Group is trading at $90.12 per share, or 1.5x forward P/B. To fully understand why you should be careful with SIGI, check out our full research report (it’s free).
One Stock to Watch:
Arlo Technologies (ARLO)
Market Cap: $1.41 billion
Originally spun off from networking equipment maker Netgear in 2018, Arlo Technologies (NYSE:ARLO) provides cloud-based smart security devices and subscription services that help consumers and businesses monitor and protect their homes, properties, and loved ones.
Why Are We Fans of ARLO?
- Annual revenue growth of 7.6% over the last five years beat the sector average and underscores the unique value of its offerings
- Incremental sales over the last two years have been highly profitable as its earnings per share increased by 55.3% annually, topping its revenue gains
- Free cash flow margin grew by 17.6 percentage points over the last five years, giving the company more chips to play with
Arlo Technologies’s stock price of $13.20 implies a valuation ratio of 16.1x 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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