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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here is one Russell 2000 stock that could deliver strong gains and two that may face some trouble.
Two Stocks to Sell:
DigitalOcean (DOCN)
Market Cap: $5.29 billion
Built for simplicity in a world of complex cloud solutions, DigitalOcean (NYSE: DOCN) provides a simplified cloud computing platform that enables developers and small businesses to quickly deploy and scale applications.
Why Are We Hesitant About DOCN?
- Customers have churned over the last year due to the commoditized nature of its software, as reflected in its 99.8% net revenue retention rate
- Gross margin of 59.9% reflects its high servicing costs
- Operating margin improvement of 5.8 percentage points over the last year demonstrates its ability to scale efficiently
DigitalOcean’s stock price of $57.23 implies a valuation ratio of 5.5x forward price-to-sales. Read our free research report to see why you should think twice about including DOCN in your portfolio.
Coursera (COUR)
Market Cap: $1.03 billion
Founded by two Stanford University computer science professors, Coursera (NYSE: COUR) is an online learning platform that offers courses, specializations, and degrees from top universities and organizations around the world.
Why Are We Cautious About COUR?
- Customer spending has dipped by 8.1% on average as it focused on growing its customers
- Estimated sales growth of 7.3% for the next 12 months implies demand will slow from its three-year trend
- High marketing expenses suggest it needs to spend heavily on new customer acquisition to sustain momentum
Coursera is trading at $6.25 per share, or 3.3x forward EV/EBITDA. Check out our free in-depth research report to learn more about why COUR doesn’t pass our bar.
One Stock to Buy:
LSI (LYTS)
Market Cap: $689 million
Enhancing commercial environments, LSI (NASDAQ: LYTS) provides lighting and display solutions for businesses and retailers.
Why Are We Backing LYTS?
- Annual revenue growth of 16.1% over the past five years was outstanding, reflecting market share gains this cycle
- Incremental sales over the last five years have been highly profitable as its earnings per share increased by 45% annually, topping its revenue gains
- Free cash flow margin expanded by 7.2 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
At $19.49 per share, LSI trades at 14.2x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today.
