Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here is one Russell 2000 stock that could be a breakout winner and two that may struggle to keep up.
Two Stocks to Sell:
Sprout Social (SPT)
Market Cap: $1.10 billion
Founded by Justyn Howard and Aaron Rankin in 2010, Sprout Social (NASDAQ: SPT) provides a software as a service platform that companies can use to schedule and respond to posts on major social media networks like Twitter, Facebook, Instagram, Youtube and LinkedIn.
Why Is SPT Not Exciting?
- Track record of operating margin losses stem from its decision to pursue growth instead of profits
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 7.2% for the last year
Sprout Social is trading at $18.99 per share, or 2.4x forward price-to-sales. Check out our free in-depth research report to learn more about why SPT doesn’t pass our bar.
OPENLANE (KAR)
Market Cap: $2.69 billion
Facilitating the sale of approximately 1.3 million used vehicles in 2023, OPENLANE (NYSE: KAR) operates digital marketplaces that connect sellers and buyers of used vehicles across North America and Europe, facilitating wholesale transactions.
Why Is KAR Risky?
- Annual sales declines of 7.9% for the past five years show its products and services struggled to connect with the market during this cycle
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 11.7 percentage points
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
OPENLANE’s stock price of $25.02 implies a valuation ratio of 24.9x forward P/E. If you’re considering KAR for your portfolio, see our FREE research report to learn more.
One Stock to Watch:
City Holding (CHCO)
Market Cap: $1.86 billion
With roots dating back to 1957 and a strategic presence along the I-64 and I-81 corridors, City Holding (NASDAQGS:CHCO) operates as a financial holding company providing banking, trust, and investment services through its subsidiary City National Bank across West Virginia, Kentucky, Virginia, and Ohio.
Why Should CHCO Be on Your Watchlist?
- Share repurchases have amplified shareholder returns as its annual earnings per share growth of 11.6% exceeded its revenue gains over the last five years
- Annual tangible book value per share growth of 15.1% over the past two years was outstanding, reflecting strong capital accumulation this cycle
- ROE punches in at 16.1%, illustrating management’s expertise in identifying profitable investments
At $128.77 per share, City Holding trades at 2.4x forward P/B. Is now a good 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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