1 Russell 2000 Stock with Impressive Fundamentals and 2 to Ignore

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.

Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here is one Russell 2000 stock that could deliver strong gains and two that may face some trouble.

Two Stocks to Sell:

Ducommun (DCO)

Market Cap: $992.6 million

California’s oldest company, Ducommun (NYSE:DCO) is a provider of engineering and manufacturing services for high-performance products primarily within the aerospace and defense industries.

Why Do We Pass on DCO?

1. Backlog growth averaged a weak 4.8% over the past two years, suggesting it may need to tweak its product roadmap or go-to-market strategy
2. Poor free cash flow margin of 1.1% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

At $66.72 per share, Ducommun trades at 17.4x forward P/E. If you’re considering DCO for your portfolio, see our FREE research report to learn more.

Kforce (KFRC)

Market Cap: $702.2 million

With nearly 60 years of matching skilled professionals with the right opportunities, Kforce (NYSE:KFRC) is a professional staffing company that specializes in placing technology and finance experts with businesses on both temporary and permanent bases.

Why Do We Think KFRC Will Underperform?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 9.8% annually over the last two years
2. Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 11.7% annually
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Kforce’s stock price of $39.63 implies a valuation ratio of 15.6x forward P/E. Check out our free in-depth research report to learn more about why KFRC doesn’t pass our bar.

One Stock to Buy:

Federal Signal (FSS)

Market Cap: $5.44 billion

Developing sirens that warned of air raid attacks or fallout during the Cold War, Federal Signal (NYSE:FSS) provides safety and emergency equipment for government agencies, municipalities, and industrial companies.

Why Will FSS Beat the Market?

1. Demand is greater than supply as the company’s 10.8% average backlog growth over the past two years shows it’s securing new contracts and accumulating more orders than it can fulfill
2. Operating margin improvement of 4.1 percentage points over the last five years demonstrates its ability to scale efficiently
3. Earnings per share grew by 29% annually over the last two years and trumped its peers

Federal Signal is trading at $89.59 per share, or 23.3x forward P/E. Is now a good time to buy? See for yourself in our full research report, it’s free.

Stocks We Like Even More

Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.

While this has caused many investors to adopt a "fearful" wait-and-see approach, we’re leaning into our best ideas that can grow regardless of the political or macroeconomic climate. Take advantage of Mr. Market by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.