Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
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 are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
Q2 Holdings (QTWO)
Market Cap: $4.18 billion
With a platform powering digital services for approximately 25 million account holders across America, Q2 Holdings (NYSE: QTWO) provides cloud-based digital solutions that help financial institutions, fintechs, and alternative finance companies deliver modern banking experiences to their customers.
Why Do We Think Twice About QTWO?
- Average ARR growth of 11.3% over the last year has disappointed, suggesting it’s had a hard time winning long-term deals and renewals
- Estimated sales growth of 10.7% for the next 12 months implies demand will slow from its two-year trend
- Gross margin of 53.4% is way below its competitors, leaving less money to invest in areas like marketing and R&D
At $66.78 per share, Q2 Holdings trades at 5.6x forward price-to-sales. Check out our free in-depth research report to learn more about why QTWO doesn’t pass our bar.
Clarus (CLAR)
Market Cap: $147.1 million
Initially a financial services business, Clarus (NASDAQ: CLAR) designs, manufactures, and distributes outdoor equipment and lifestyle products.
Why Do We Think CLAR Will Underperform?
- Sales trends were unexciting over the last five years as its 4.2% annual growth was below the typical consumer discretionary company
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Clarus’s stock price of $3.83 implies a valuation ratio of 24.7x forward P/E. To fully understand why you should be careful with CLAR, check out our full research report (it’s free).
JELD-WEN (JELD)
Market Cap: $271.7 million
Founded in the 1960s as a general wood-making company, JELD-WEN (NYSE: JELD) manufactures doors, windows, and other related building products.
Why Do We Avoid JELD?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
JELD-WEN is trading at $3.18 per share, or 11x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than JELD.
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