1 Russell 2000 Stock to Keep an Eye On and 2 Facing Challenges

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. Keeping that in mind, here is one Russell 2000 stock that could be the next big thing and two that may struggle to keep up.

Two Stocks to Sell:

Teladoc (TDOC)

Market Cap: $1.43 billion

Founded to help people in rural areas get online medical consultations, Teladoc Health (NYSE:TDOC) is a telemedicine platform that facilitates remote doctor’s visits.

Why Does TDOC Worry Us?

1. Sales trends were unexciting over the last three years as its 2.9% annual growth was below the typical consumer internet company
2. Preference for prioritizing user growth over monetization has led to 7.9% annual drops in its average revenue per user
3. Demand will likely fall over the next 12 months as Wall Street expects flat revenue

At $7.72 per share, Teladoc trades at 4.9x forward EV/EBITDA. To fully understand why you should be careful with TDOC, check out our full research report (it’s free for active Edge members).

Kadant (KAI)

Market Cap: $3.21 billion

Headquartered in Massachusetts, Kadant (NYSE:KAI) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide.

Why Do We Think Twice About KAI?

1. Sales trends were unexciting over the last two years as its 3.8% annual growth was below the typical industrials company
2. Earnings per share fell by 3.6% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 3.7 percentage points

Kadant’s stock price of $267.51 implies a valuation ratio of 27.5x forward P/E. Read our free research report to see why you should think twice about including KAI in your portfolio.

One Stock to Watch:

Byline Bancorp (BY)

Market Cap: $1.25 billion

Ranking as the fifth most active Small Business Administration lender in the country, Byline Bancorp (NYSE:BY) is a Chicago-based bank that provides banking services to small and medium-sized businesses, commercial real estate developers, and consumers.

Why Could BY Be a Winner?

1. Annual net interest income growth of 12.3% over the last five years was superb and indicates its market share increased during this cycle
2. Incremental sales over the last five years have been highly profitable as its earnings per share increased by 21.8% annually, topping its revenue gains
3. Impressive 17.5% annual tangible book value per share growth over the last two years indicates it’s building equity value this cycle

Byline Bancorp is trading at $27 per share, or 1x forward P/B. Is now a good time to buy? Find out in our full research report, it’s free for active Edge members.

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