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 are two Russell 2000 stocks that could deliver strong gains and one best left off your watchlist.
One Stock to Sell:
Driven Brands (DRVN)
Market Cap: $2.28 billion
With approximately 5,000 locations across 49 U.S. states and 13 other countries, Driven Brands (NASDAQ: DRVN) operates a network of automotive service centers offering maintenance, car washes, paint, collision repair, and glass services across North America.
Why Do We Think Twice About DRVN?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Push for growth has led to negative returns on capital, signaling value destruction, and its falling returns suggest its earlier profit pools are drying up
Driven Brands is trading at $13.85 per share, or 10.1x forward P/E. Check out our free in-depth research report to learn more about why DRVN doesn’t pass our bar.
Two Stocks to Buy:
Blue Bird (BLBD)
Market Cap: $1.60 billion
With around a century of experience, Blue Bird (NASDAQ: BLBD) is a manufacturer of school buses and complementary parts.
Why Do We Love BLBD?
- Market share has increased this cycle as its 14.3% annual revenue growth over the last two years was exceptional
- Incremental sales over the last two years have been highly profitable as its earnings per share increased by 317% annually, topping its revenue gains
- Returns on capital are climbing as management makes more lucrative bets
Blue Bird’s stock price of $53 implies a valuation ratio of 12.3x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.
The Bancorp (TBBK)
Market Cap: $2.77 billion
Operating behind the scenes of many popular fintech apps and prepaid cards you might use daily, The Bancorp (NASDAQ: TBBK) is a bank holding company that specializes in providing banking services to fintech companies and offering specialty lending products.
Why Is TBBK a Top Pick?
- Annual net interest income growth of 14.6% over the past five years was outstanding, reflecting market share gains this cycle
- Differentiated product suite is reflected in its Strong performance of its loan book results in a High-yielding loan book and low cost of funds lead to a best-in-class net interest margin of 4.6%
- Earnings per share grew by 18.5% annually over the last two years and trumped its peers
At $60.99 per share, The Bancorp trades at 3.8x forward P/B. Is now a good time to buy? See for yourself in our in-depth research report, it’s free for active Edge members.
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