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 be a breakout winner and two that may face some trouble.
Two Stocks to Sell:
CECO Environmental (CECO)
Market Cap: $4.34 billion
With roots dating back to 1869 and a focus on creating cleaner industrial operations, CECO Environmental (NASDAQ:CECO) provides technology and expertise that helps industrial companies reduce emissions, treat water, and improve energy efficiency across various sectors.
Why Is CECO Not Exciting?
- Modest revenue base of $903.2 million means it has less operating leverage but can also grow faster if it executes the right sales strategy
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 4.8 percentage points
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
CECO Environmental’s stock price of $74.10 implies a valuation ratio of 28.1x forward P/E. To fully understand why you should be careful with CECO, check out our full research report (it’s free).
Select Water Solutions (WTTR)
Market Cap: $2.59 billion
Managing over 24 billion barrels of produced water annually across major U.S. shale plays, Select Water Solutions (NYSE:WTTR) provides water sourcing, recycling, disposal, and treatment services for oil and gas producers.
Why Does WTTR Worry Us?
- Modest revenue base of $1.43 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Gross margin of 24.2% is below its competitors, leaving less money to invest in exploration and production
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.6% for the last five years
Select Water Solutions is trading at $20.10 per share, or 33.9x forward P/E. Read our free research report to see why you should think twice about including WTTR in your portfolio.
One Stock to Watch:
Cadre (CDRE)
Market Cap: $1.27 billion
Originally known as Safariland, Cadre (NYSE:CDRE) specializes in manufacturing and distributing safety and survivability equipment for first responders.
Why Are We Fans of CDRE?
- Impressive 13.5% annual revenue growth over the last two years indicates it’s winning market share this cycle
- Operating margin improvement of 6.7 percentage points over the last five years demonstrates its ability to scale efficiently
- Earnings per share have massively outperformed its peers over the last four years, increasing by 40.8% annually
At $29.76 per share, Cadre trades at 20.9x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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