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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
CTS (CTS)
Market cap: $1.79 billion
With roots dating back to 1896 and a global manufacturing footprint, CTS (NYSE: CTS) designs and manufactures sensors, connectivity components, and actuators for aerospace, defense, industrial, medical, and transportation markets.
Why Are We Cautious About CTS?
- Sales trends were unexciting over the last five years as its 2.5% annual growth was below the typical business services company
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 21 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
CTS is trading at $63.01 per share, or 22x forward P/E. Dive into our free research report to see why there are better opportunities than CTS.
Werner (WERN)
Market cap: $1.72 billion
Conducting business in over a 100 countries, Werner (NASDAQ: WERN) offers full-truckload, less-than-truckload, and intermodal delivery services.
Why Should You Sell WERN?
- Annual revenue growth of 5.2% over the last two years was below our standards for the industrials sector
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 32.5% 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
Werner’s stock price of $28.69 implies a valuation ratio of 20.1x forward P/E. To fully understand why you should be careful with WERN, check out our full research report (it’s free).
RPC (RES)
Market cap: $1.30 billion
Operating primarily in the Permian Basin with 10 hydraulic fracturing fleets, RPC (NYSE: RES) provides specialized services and equipment like hydraulic fracturing, coiled tubing, and cementing to help oil and gas companies complete and maintain wells.
Why Does RES Fall Short?
- Subscale operations are evident in its revenue base of $1.81 billion, meaning it has fewer distribution channels than its larger rivals
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 28%
- Day-to-day expenses have swelled relative to revenue over the last five years as its EBITDA margin fell by 6.3 percentage points
At $5.98 per share, RPC trades at 20.7x forward P/E. Check out our free in-depth research report to learn more about why RES doesn’t pass our bar.
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