The Russell 2000 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 be a breakout winner and two that may struggle to keep up.
Two Stocks to Sell:
Agilysys (AGYS)
Market Cap: $2.01 billion
Originally a subsidiary of Pioneer-Standard Electronics that distributed electronic components, Agilysys (NASDAQ: AGYS) offers a software-as-service platform that helps hotels, resorts, restaurants, and other hospitality businesses manage their operations and workflows.
Why Are We Cautious About AGYS?
- Steep infrastructure costs and weaker unit economics for a software company are reflected in its low gross margin of 62.7%
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 4.7 percentage points
Agilysys is trading at $72.10 per share, or 6.7x forward price-to-sales. If you’re considering AGYS for your portfolio, see our FREE research report to learn more.
Worthington (WOR)
Market Cap: $2.51 billion
Founded by a steel salesman, Worthington (NYSE: WOR) specializes in steel processing, pressure cylinders, and engineered cabs for commercial markets.
Why Should You Sell WOR?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 19.4% annually over the last five years
- Earnings per share have dipped by 21% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $50.09 per share, Worthington trades at 16.9x forward price-to-earnings. To fully understand why you should be careful with WOR, check out our full research report (it’s free).
One Stock to Buy:
Napco (NSSC)
Market Cap: $838 million
Protecting everything from schools to government facilities since 1969, Napco Security Technologies (NASDAQ: NSSC) manufactures electronic security devices, access control systems, and communication services for intrusion and fire alarm systems.
Why Will NSSC Beat the Market?
- Market share has increased this cycle as its 11.8% annual revenue growth over the last five years was exceptional
- NSSC is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders, and its recently improved profitability means it has even more resources to invest or distribute
- Rising returns on capital show management is finding more attractive investment opportunities
Napco’s stock price of $23.02 implies a valuation ratio of 14.9x forward price-to-earnings. Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.
Stocks We Like Even More
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Take advantage of the rebound by checking out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.
