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. That said, here is one Russell 2000 stock that could deliver strong gains and two that may struggle to keep up.
Two Stocks to Sell:
Inter Parfums (IPAR)
Market Cap: $3.21 billion
With licenses to produce colognes and perfumes under brands such as Kate Spade, Van Cleef & Arpels, and Abercrombie & Fitch, Inter Parfums (NASDAQ: IPAR) manufactures and distributes fragrances worldwide.
Why Does IPAR Worry Us?
- Smaller revenue base of $1.49 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- Capital intensity has ramped up over the last year as its free cash flow margin decreased by 2.2 percentage points
At $100.19 per share, Inter Parfums trades at 19.1x forward P/E. If you’re considering IPAR for your portfolio, see our FREE research report to learn more.
Winnebago (WGO)
Market Cap: $794.8 million
Created to provide high-quality, affordable RVs to the post-war American family, Winnebago (NYSE: WGO) is a manufacturer of recreational vehicles, providing a range of motorhomes, travel trailers, and fifth-wheel products for outdoor and adventure lifestyles.
Why Do We Avoid WGO?
- Sales tumbled by 3.7% annually over the last two years, showing market trends are working against it during this cycle
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Winnebago is trading at $28.14 per share, or 10.8x forward P/E. To fully understand why you should be careful with WGO, check out our full research report (it’s free).
One Stock to Watch:
Cadre (CDRE)
Market Cap: $1.33 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?
- Annual revenue growth of 11.8% over the past two years was outstanding, reflecting market share gains this cycle
- Projected revenue growth of 17.6% for the next 12 months is above its two-year trend, pointing to accelerating demand
- Operating margin expanded by 4.5 percentage points over the last five years as it scaled and became more efficient
Cadre’s stock price of $30.37 implies a valuation ratio of 1.7x forward price-to-sales. Is now a good time to buy? See for yourself in our full research report, it’s free.
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