The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.
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 a breakout winner and two best left off your watchlist.
Two Stocks to Sell:
Wendy's (WEN)
Market Cap: $1.45 billion
Founded by Dave Thomas in 1969, Wendy’s (NASDAQ:WEN) is a renowned fast-food chain known for its fresh, never-frozen beef burgers, flavorful menu options, and commitment to quality.
Why Is WEN Risky?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 3.4 percentage points
- 8× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Wendy's is trading at $7.62 per share, or 16.2x forward P/E. Check out our free in-depth research report to learn more about why WEN doesn’t pass our bar.
Viasat (VSAT)
Market Cap: $10.71 billion
Operating a fleet of 23 satellites that orbit the Earth and beam connectivity from space, Viasat (NASDAQ:VSAT) provides satellite-based communications networks and services for airlines, maritime vessels, governments, businesses, and residential customers worldwide.
Why Are We Out on VSAT?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Earnings per share fell by 8.4% annually over the last five years while its revenue grew, partly because it diluted shareholders
- Cash-burning history makes us doubt the long-term viability of its business model
At $77.75 per share, Viasat trades at 9.9x forward EV-to-EBITDA. If you’re considering VSAT for your portfolio, see our FREE research report to learn more.
One Stock to Watch:
Skyward Specialty Insurance (SKWD)
Market Cap: $2.51 billion
Founded in 2006 to serve markets where standard insurance coverage falls short, Skyward Specialty Insurance (NASDAQ:SKWD) provides customized commercial property, casualty, and health insurance solutions for underserved or specialized market niches.
Why Are We Positive on SKWD?
- Market penetration was impressive this cycle as its net premiums earned expanded by 29.5% annually over the last two years
- Revenue outlook for the upcoming 12 months is outstanding and shows it’s on track to gain market share
- Annual book value per share growth of 25.8% over the last two years was superb and indicates its capital strength increased during this cycle
Skyward Specialty Insurance’s stock price of $56.50 implies a valuation ratio of 1.9x forward P/B. Is now a good time to buy? See for yourself in our full research report, it’s free.
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