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 face some trouble.
Two Stocks to Sell:
ABM (ABM)
Market Cap: $2.57 billion
With roots dating back to 1909 as a window washing company, ABM Industries (NYSE: ABM) provides integrated facility management, infrastructure, and mobility solutions across various sectors including commercial, manufacturing, education, and aviation.
Why Does ABM Worry Us?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Earnings per share were flat over the last two years while its revenue grew, showing its incremental sales were less profitable
- Lacking free cash flow margin got worse over the last five years as its investment needs accelerated
ABM’s stock price of $43.77 implies a valuation ratio of 11x forward P/E. If you’re considering ABM for your portfolio, see our FREE research report to learn more.
Merchants Bancorp (MBIN)
Market Cap: $1.99 billion
With a strategic focus on low-risk, government-backed lending programs, Merchants Bancorp (NASDAQCM:MBIN) is an Indiana-based bank holding company specializing in multi-family mortgage banking, mortgage warehousing, and traditional banking services.
Why Are We Wary of MBIN?
- Inferior net interest margin of 2.9% means it must compensate for lower profitability through increased loan originations
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
- Tier one capital ratio of 9.2% is insufficient to meet regulatory requirements, increasing the probability of government intervention
Merchants Bancorp is trading at $43.27 per share, or 0.9x forward P/B. Dive into our free research report to see why there are better opportunities than MBIN.
One Stock to Buy:
Badger Meter (BMI)
Market Cap: $4.55 billion
The developer of the world’s first frost-proof water meter in 1905, Badger Meter (NYSE: BMI) provides water control and measure equipment to various industries.
Why Is BMI a Good Business?
- Market share has increased this cycle as its 16.6% annual revenue growth over the last five years was exceptional
- Incremental sales over the last two years have been highly profitable as its earnings per share increased by 23.6% annually, topping its revenue gains
- Strong free cash flow margin of 16.1% enables it to reinvest or return capital consistently, and its improved cash conversion implies it’s becoming a less capital-intensive business
At $158.73 per share, Badger Meter trades at 31x forward P/E. Is now the right time to buy? See for yourself in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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