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 that don’t make the cut and some better choices instead.
Petco (WOOF)
Market cap: $710.3 million
Historically known for its window displays of pets for sale or adoption, Petco (NASDAQ: WOOF) is a specialty retailer of pet food and supplies as well as a provider of services such as wellness checks and grooming.
Why Do We Avoid WOOF?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Negative returns on capital show that some of its growth strategies have backfired
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Petco’s stock price of $2.50 implies a valuation ratio of 10.4x forward P/E. Check out our free in-depth research report to learn more about why WOOF doesn’t pass our bar.
Flowers Foods (FLO)
Market cap: $1.31 billion
With Wonder Bread as its premier brand, Flowers Foods (NYSE: FLO) is a packaged foods company that focuses on bakery products such as breads, buns, and cakes.
Why Do We Pass on FLO?
- Shrinking unit sales over the past two years suggest it might have to lower prices to stimulate growth
- Forecasted revenue decline of 3.3% for the upcoming 12 months implies demand will fall off a cliff
- Earnings per share fell by 24.3% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable
Flowers Foods is trading at $6.21 per share, or 9x forward P/E. To fully understand why you should be careful with FLO, check out our full research report (it’s free).
Tandem Diabetes (TNDM)
Market cap: $1.34 billion
With technology that automatically adjusts insulin delivery based on continuous glucose monitoring data, Tandem Diabetes Care (NASDAQ: TNDM) develops and manufactures automated insulin delivery systems that help people with diabetes manage their blood glucose levels.
Why Should You Sell TNDM?
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 83.1% annually
- Negative returns on capital show that some of its growth strategies have backfired
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital on unfavorable terms if market conditions deteriorate
At $19.22 per share, Tandem Diabetes trades at 19.7x forward EV-to-EBITDA. If you’re considering TNDM for your portfolio, see our FREE research report to learn more.
Stocks we like more
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