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.
Energizer (ENR)
Market Cap: $1.48 billion
Masterminds behind the viral Energizer Bunny mascot, Energizer (NYSE: ENR) is one of the world's largest manufacturers of batteries.
Why Does ENR Fall Short?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.3%
- Capital intensity has ramped up over the last year as its free cash flow margin decreased by 4.6 percentage points
At $20.49 per share, Energizer trades at 5.6x forward P/E. Dive into our free research report to see why there are better opportunities than ENR.
WD-40 (WDFC)
Market Cap: $3.31 billion
Short for “Water Displacement perfected on the 40th try”, WD-40 (NASDAQ: WDFC) is a renowned American consumer goods company known for its iconic and versatile spray, WD-40 Multi-Use Product.
Why Does WDFC Give Us Pause?
- Annual revenue growth of 5.7% over the last three years was below our standards for the consumer staples sector
- Smaller revenue base of $610.6 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Free cash flow margin dropped by 10 percentage points over the last year, implying the company became more capital intensive as competition picked up
WD-40’s stock price of $239.89 implies a valuation ratio of 42.5x forward P/E. Check out our free in-depth research report to learn more about why WDFC doesn’t pass our bar.
Evolent Health (EVH)
Market Cap: $983.7 million
Founded in 2011 to transform how healthcare is delivered to patients with complex needs, Evolent Health (NYSE: EVH) provides specialty care management services and technology solutions that help health plans and providers deliver better care for patients with complex conditions.
Why Are We Cautious About EVH?
- Sales are projected to tank by 10.2% over the next 12 months as demand evaporates
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.6% for the last five years
- Negative returns on capital show management lost money while trying to expand the business
Evolent Health is trading at $8.48 per share, or 15.3x forward P/E. Read our free research report to see why you should think twice about including EVH in your portfolio.
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