3 Russell 2000 Growth Stocks That Could Be Worth the Risk

The Russell 2000 index, which focuses on small-cap stocks, is brimming with companies that may benefit from a potential rate cut later this year. Lower borrowing costs tend to disproportionately benefit smaller, more agile companies because of their high capital requirements for growth.

Which Russell 2000 constituents stand out as top buys right now? Wall Street analysts think the following three stocks are among the index's most undervalued. These innovation-forward firms are indeed risky, but their enormous upside potentials may warrant a place in a speculative growth portfolio. Read on to find out more.

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Longboard Pharmaceuticals: A biotech with room to run

Longboard Pharmaceuticals (NASDAQ: LBPH) is a clinical-stage biopharmaceutical company that specializes in the neuroscience field. This innovative biotech focuses on developing novel therapies for neurological diseases, an area ripe for breakthroughs and potentially significant returns.

The company's lead candidate, bexicaserin (LP352), is currently in midstage development for developmental and epileptic encephalopathies. It represents a potential game-changer for patients suffering from these debilitating neurological conditions.

Longboard Pharmaceuticals has a market capitalization of just under $1.4 billion at the time of this writing. It has substantial room for growth if its pipeline delivers, given bexicaserin's $1 billion-plus peak sales projections.

Keeping with this theme, analysts are bullish on Longboard Pharmaceuticals stock. The current consensus price target on the biotech implies a hefty 49% upside over the next 12 months. However, like all developmental-stage biotech investments, this potential comes with significant risks because of the inherent uncertainty involved in clinical trials.

Avidity Biosciences: An intriguing rare disease stock

Avidity Biosciences (NASDAQ: RNA) is another biotech company that's caught investors' attention. The company is pioneering a new class of oligonucleotide-based therapies called Antibody Oligonucleotide Conjugates (AOCs). These innovative treatments could revolutionize the approach to rare muscular disorders.

The company's lead program, del-desiran (AOC 1001), is poised to enter late-stage testing for myotonic dystrophy type 1. As a novel therapeutic for a rare muscle disorder, this drug could create significant value for long-term shareholders.

Speaking to this point, Wall Street's consensus price target on Avidity Biosciences' stock suggests a 36.4% upside in the next 12 months. However, investors should remember that the company's success hinges on ongoing clinical trials in tough-to-treat muscle conditions, making this rare-disease specialist a high-risk play.

SoundHound AI: An artificial intelligence play

SoundHound AI (NASDAQ: SOUN) operates at the cutting edge of artificial intelligence (AI). This forward-thinking company is at the forefront of voice AI technology, developing solutions that could transform how humans interact with machines.

SoundHound's technology is already being integrated into vehicles, restaurants, and smart home devices. The continued growth and integration of AI across various sectors positions SoundHound as a potentially key player in this rapidly expanding field.

The company's financials are showing positive momentum, with revenue growth accelerating and margin improving in the most recent quarter. Analysts project a potential 50% upside over the next year, reflecting optimism about SoundHound's market position and growth prospects.

However, investors should note that the AI sector is highly competitive and rapidly evolving. SoundHound faces competition from both established tech giants and nimble startups. The company's success will depend on its ability to continue innovating and securing key partnerships in a crowded marketplace.

Key takeaways

The Russell 2000 index offers significant growth potential, especially with interest rate cuts on the horizon. Longboard Pharmaceuticals, Avidity Biosciences, and SoundHound AI represent innovative companies in biotech and AI, fields that could see substantial growth in the coming years.

However, these high-potential small-cap stocks do come with a notable risk profile. Biotech companies face the uncertainties of clinical trials and regulatory approval, while tech companies must navigate rapidly changing markets and intense competition.

Consequently, it might be wise to hold these stocks in a separate speculative growth portfolio -- one that won't affect the performance of your retirement or income portfolios.

George Budwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .