Anthony Lee
3 min read
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.
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. Keeping that in mind, here is one Russell 2000 stock that could deliver strong gains and two best left off your watchlist.
Two Stocks to Sell:
Bandwidth (BAND)
Market Cap: $1.39 billion
Powering communications for tech giants like Microsoft, Google, and Zoom, Bandwidth (NASDAQ:BAND) provides cloud-based communications software and APIs that enable businesses to embed voice, messaging, and emergency services into their applications and platforms.
Why Do We Pass on BAND?
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11.9% annual revenue growth over the last two years was slower than its software peers
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Bad unit economics and steep infrastructure costs are reflected in its gross margin of 37.2%, one of the worst among software companies
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Operating margin failed to increase over the last year, indicating the company couldn’t optimize its expenses
Bandwidth’s stock price of $42.97 implies a valuation ratio of 1.8x forward price-to-sales. Check out our free in-depth research report to learn more about why BAND doesn’t pass our bar.
Centrus Energy (LEU)
Market Cap: $2.35 billion
Operating the only active U.S. facility licensed to produce high-assay low-enriched uranium (HALEU) for next-generation reactors, Centrus Energy (NYSE:LEU) supplies enriched uranium, the fissile component needed to produce fuel for nuclear power reactors.
Why Do We Steer Clear of LEU?
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Subscale operations are evident in its revenue base of $473.9 million, meaning it has fewer distribution channels than its larger rivals
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Gross margin of 32.3% is below its competitors, leaving less money to invest in exploration and production
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Expenses have increased as a percentage of revenue over the last five years as its EBITDA margin fell by 46.1 percentage points
Centrus Energy is trading at $114.80 per share, or 37.7x forward P/E. Read our free research report to see why you should think twice about including LEU in your portfolio, it’s free.
One Stock to Buy:
Axos Financial (AX)
Market Cap: $5.00 billion
Originally founded as Bank of Internet USA in 1999 before rebranding in 2018, Axos Financial (NYSE:AX) is a diversified financial services company that provides digital banking, securities clearing, and investment advisory solutions to retail and business customers nationwide.
