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 are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
Health Catalyst (HCAT)
Market Cap: $214.6 million
Built on its "Health Catalyst Flywheel" methodology that emphasizes measurable outcomes, Health Catalyst (NASDAQ:HCAT) provides data and analytics technology and services that help healthcare organizations manage their data and drive measurable clinical, financial, and operational improvements.
Why Do We Steer Clear of HCAT?
- Sales trends were unexciting over the last two years as its 5.4% annual growth was well below the typical software company
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Negative free cash flow raises questions about the return timeline for its investments
Health Catalyst’s stock price of $2.99 implies a valuation ratio of 0.7x forward price-to-sales. Check out our free in-depth research report to learn more about why HCAT doesn’t pass our bar.
Central Garden & Pet (CENT)
Market Cap: $1.82 billion
Enhancing the lives of both pets and homeowners, Central Garden & Pet (NASDAQ:CENT) is a leading producer and distributor of essential products for pet care, lawn and garden maintenance, and pest control.
Why Are We Out on CENT?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Sales are projected to be flat over the next 12 months and imply weak demand
- Underwhelming 9.1% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its decreasing returns suggest its historical profit centers are aging
Central Garden & Pet is trading at $31.36 per share, or 11.3x forward P/E. Dive into our free research report to see why there are better opportunities than CENT.
Steelcase (SCS)
Market Cap: $1.83 billion
Founded in 1912 when metal office furniture was replacing wooden alternatives, Steelcase (NYSE:SCS) is a global office furniture manufacturer that designs and produces workplace solutions including desks, chairs, architectural products, and services.
Why Should You Sell SCS?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Earnings per share were flat over the last five years and fell short of the peer group average
- Low free cash flow margin of 0.7% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $15.93 per share, Steelcase trades at 13.3x forward P/E. If you’re considering SCS for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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