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 the next big thing and two that may face some trouble.
Two Stocks to Sell:
Itron (ITRI)
Market Cap: $4.54 billion
Founded by a small group of engineers who wanted to build a more efficient way to read utility meters, Itron (NASDAQ: ITRI) offers energy and water management products for the utility industry, municipalities, and industrial customers.
Why Are We Cautious About ITRI?
- Annual sales declines of 1% for the past two years show its products and services struggled to connect with the market during this cycle
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Itron’s stock price of $103.75 implies a valuation ratio of 16.1x forward P/E. Read our free research report to see why you should think twice about including ITRI in your portfolio.
U.S. Physical Therapy (USPH)
Market Cap: $1.19 billion
With a nationwide footprint spanning 671 clinics across 42 states, U.S. Physical Therapy (NYSE: USPH) operates a network of outpatient physical therapy clinics and provides industrial injury prevention services to employers across the United States.
Why Is USPH Not Exciting?
- Revenue base of $795.5 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $80.25 per share, U.S. Physical Therapy trades at 25x forward P/E. Check out our free in-depth research report to learn more about why USPH doesn’t pass our bar.
One Stock to Watch:
Butterfield Bank (NTB)
Market Cap: $2.45 billion
Founded in 1784 as one of the oldest banks in the Western Hemisphere, Butterfield Bank (NYSE: NTB) provides banking, wealth management, and trust services to individuals and businesses in select offshore financial centers including Bermuda, Cayman Islands, and the Channel Islands.
Why Do We Like NTB?
- Market share is on track to rise over the next 12 months as its 32.8% projected net interest income growth implies demand will accelerate from its five-year trend
- Capital strength is on track to rise over the next 12 months as its 30.4% projected tangible book value per share growth implies profitability will accelerate from its two-year trend
- Market-beating return on equity illustrates that management has a knack for investing in profitable ventures
Butterfield Bank is trading at $62.34 per share, or 1.9x forward P/B. Is now the right time to buy? Find out in our full research report, it’s free.
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