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.
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 the next big thing and two that may struggle to keep up.
Two Stocks to Sell:
DNOW (DNOW)
Market Cap: $2.40 billion
Spun off from National Oilwell Varco, DNOW (NYSE: DNOW) provides distribution and supply chain solutions for the energy and industrial end markets.
Why Does DNOW Give Us Pause?
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 6.9 percentage points
- Revenue growth over the past two years was nullified by the company’s new share issuances as its earnings per share fell by 13.9% annually
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $13.08 per share, DNOW trades at 0.5x forward price-to-sales. To fully understand why you should be careful with DNOW, check out our full research report (it’s free).
Northern Oil and Gas (NOG)
Market Cap: $2.46 billion
Taking the path less traveled in the oil industry by choosing not to operate its own wells, Northern Oil and Gas (NYSE: NOG) acquires minority stakes in oil and gas wells operated by other companies across major U.S. shale basins.
Why Do We Think Twice About NOG?
- Efficiency has decreased over the last five years as its EBITDA margin fell by 3.2 percentage points
- High net-debt-to-EBITDA ratio of 15× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Northern Oil and Gas’s stock price of $23.40 implies a valuation ratio of 6.6x forward P/E. Check out our free in-depth research report to learn more about why NOG doesn’t pass our bar.
One Stock to Watch:
ServisFirst Bancshares (SFBS)
Market Cap: $4.13 billion
Founded in 2005 with a focus on serving underserved mid-sized businesses, ServisFirst Bancshares (NYSE: SFBS) is a bank holding company that provides commercial banking services to businesses and professionals through its subsidiary ServisFirst Bank.
Why Are We Fans of SFBS?
- Annual revenue growth of 17.5% over the past two years was outstanding, reflecting market share gains this cycle
- Net interest margin expanded by 53.2 basis points (100 basis points = 1 percentage point) over the last two years, providing additional flexibility for investments
- Annual tangible book value per share growth of 13.1% over the past five years was outstanding, reflecting strong capital accumulation this cycle
ServisFirst Bancshares is trading at $75.47 per share, or 2x forward P/B. Is now a good time to buy? Find out in our full research report, it’s free.
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