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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. That said, here is one Russell 2000 stock that could deliver strong gains and two best left off your watchlist.

Two Industrials Stocks to Sell:

Richardson Electronics (RELL)

Market Cap: $126 million

Founded in 1947, Richardson Electronics (NASDAQ:RELL) is a distributor of power grid and microwave tubes as well as consumables related to those products.

Why Do We Avoid RELL?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 12.3% annually over the last two years

2. Earnings per share have contracted by 74.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance

3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.4% for the last five years

Richardson Electronics is trading at $9.23 per share, or 12.4x forward P/E. Read our free research report to see why you should think twice about including RELL in your portfolio, it’s free.

Champion Homes (SKY)

Market Cap: $4.95 billion

Founded in 1951, Champion Homes (NYSE:SKY) is a manufacturer of modular homes and buildings in North America.

Why Are We Hesitant About SKY?

1. Flat unit sales over the past two years imply it may need to invest in improvements to get back on track

2. Performance over the past two years was negatively impacted by new share issuances as its earnings per share dropped by 31.5% annually, worse than its revenue

3. Diminishing returns on capital suggest its earlier profit pools are drying up

At $84.42 per share, Champion Homes trades at 23.1x forward P/E. Check out our free in-depth research report to learn more about why SKY doesn’t pass our bar.

One Industrials Stock to Buy:

Graham Corporation (GHM)

Market Cap: $361.2 million

Founded when its founder patented a unique design for a vacuum system used in the sugar refining process, Graham (NYSE:GHM) provides vacuum and heat transfer equipment for the energy, petrochemical, refining, and chemical sectors.

Why Are We Backing GHM?

1. Market share has increased this cycle as its 17% annual revenue growth over the last five years was exceptional

2. Earnings growth has trumped its peers over the last two years as its EPS has compounded at 298% annually

3. Free cash flow margin jumped by 5.6 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends