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.
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. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
ThredUp (TDUP)
Market Cap: $633.6 million
Founded to revolutionize thrifting, ThredUp (NASDAQ: TDUP) is a leading online fashion resale marketplace offering a wide selection of gently-used clothing and accessories.
Why Is TDUP Risky?
- Number of orders has disappointed over the past two years, indicating weak demand for its offerings
- Suboptimal cost structure is highlighted by its history of operating margin losses
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.5% for the last two years
ThredUp’s stock price of $4.78 implies a valuation ratio of 28x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than TDUP.
RXO (RXO)
Market Cap: $4.80 billion
With access to millions of trucks, RXO (NYSE: RXO) offers full-truckload, less-than-truckload, and last-mile deliveries.
Why Do We Pass on RXO?
- Declining unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $29.04 per share, RXO trades at 205.9x forward P/E. Check out our free in-depth research report to learn more about why RXO doesn’t pass our bar.
Amneal (AMRX)
Market Cap: $4.69 billion
Founded in 2002 and growing into one of America's largest generic drug producers, Amneal Pharmaceuticals (NASDAQ: AMRX) develops, manufactures, and distributes generic medicines, specialty branded drugs, biosimilars, and injectable products for the U.S. healthcare market.
Why Does AMRX Give Us Pause?
- Estimated sales growth of 2.2% for the next 12 months implies demand will slow from its two-year trend
- Free cash flow margin was stuck in limbo over the last five years
- Underwhelming 4.9% return on capital reflects management’s difficulties in finding profitable growth opportunities
Amneal is trading at $14.68 per share, or 14.7x forward P/E. If you’re considering AMRX for your portfolio, see our FREE research report to learn more.
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