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The Russell 2000 (^RUT) is packed with potential breakout stocks, thanks to its focus on smaller companies with high growth potential. However, smaller size also means these businesses often lack the resilience and financial flexibility of large-cap firms, making careful selection crucial.

Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here is one Russell 2000 stock that could be the next big thing and two that may face some trouble.

Two Stocks to Sell:

Monro (MNRO)

Market Cap: $459.4 million

Started as a single location in Rochester, New York, Monro (NASDAQ:MNRO) provides common auto services such as brake repairs, tire replacements, and oil changes.

Why Is MNRO Risky?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations

2. Modest revenue base of $1.20 billion gives it less fixed cost leverage and fewer distribution channels than larger companies

3. Earnings per share have contracted by 24.4% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance

Monro’s stock price of $15.50 implies a valuation ratio of 18.6x forward P/E. Dive into our free research report to see why there are better opportunities than MNRO.

FARO (FARO)

Market Cap: $814.6 million

Launched by two PhD students in a garage, FARO (NASDAQ:FARO) provides 3D measurement and imaging systems for the manufacturing, construction, engineering, and public safety industries.

Why Is FARO Not Exciting?

1. Annual sales declines of 1.5% for the past five years show its products and services struggled to connect with the market during this cycle

2. Persistent operating margin losses suggest the business manages its expenses poorly

3. Cash burn makes us question whether it can achieve sustainable long-term growth

At $42.31 per share, FARO trades at 38.2x forward P/E. Check out our free in-depth research report to learn more about why FARO doesn’t pass our bar.

One Stock to Buy:

EXL (EXLS)

Market Cap: $7.48 billion

Originally founded as an outsourcing company in 1999 before evolving into a technology-focused enterprise, EXL (NASDAQ:EXLS) provides data analytics and AI-powered digital operations solutions that help businesses transform their operations and make better decisions.

Why Do We Love EXLS?

1. Annual revenue growth of 13.8% over the last five years was superb and indicates its market share increased during this cycle

2. Share buybacks catapulted its annual earnings per share growth to 22.6%, which outperformed its revenue gains over the last five years

3. Robust free cash flow margin of 11.5% gives it many options for capital deployment