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 are three Russell 2000 stocks to avoid and better alternatives to consider.
First Watch (FWRG)
Market Cap: $692.3 million
Based on a nautical reference to the first work shift aboard a ship, First Watch (NASDAQ: FWRG) is a chain of breakfast and brunch restaurants whose menu is heavily-focused on eggs and griddle items such as pancakes.
Why Are We Cautious About FWRG?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Cash burn makes us question whether it can achieve sustainable long-term growth
- 8× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
First Watch is trading at $11.23 per share, or 53.2x forward P/E. Dive into our free research report to see why there are better opportunities than FWRG.
Vishay Precision (VPG)
Market Cap: $1.29 billion
Emerging from Vishay Intertechnology in 2010, Vishay Precision (NYSE: VPG) operates as a global provider of precision measurement and sensing technologies.
Why Should You Sell VPG?
- Sales tumbled by 4% annually over the last two years, showing market trends are working against its favor during this cycle
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 15.6% annually while its revenue grew
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $101.04 per share, Vishay Precision trades at 79.4x forward P/E. To fully understand why you should be careful with VPG, check out our full research report (it’s free).
JELD-WEN (JELD)
Market Cap: $126.6 million
Founded in the 1960s as a general wood-making company, JELD-WEN (NYSE: JELD) manufactures doors, windows, and other related building products.
Why Should You Dump JELD?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
JELD-WEN’s stock price of $1.47 implies a valuation ratio of 10.4x forward EV-to-EBITDA. If you’re considering JELD for your portfolio, see our FREE research report to learn more.
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