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 avoid and better alternatives to consider.
Bumble (BMBL)
Market Cap: $803.6 million
Started by the co-founder of Tinder, Whitney Wolfe Herd, Bumble (NASDAQ:BMBL) is a leading dating app built with women at the center.
Why Are We Hesitant About BMBL?
- Preference for prioritizing user growth over monetization has led to 4.9% annual drops in its average revenue per buyer
- Estimated sales decline of 9.7% for the next 12 months implies a challenging demand environment
- Capital intensity has ramped up over the last few years as its free cash flow margin decreased by 4.4 percentage points
Bumble is trading at $7.71 per share, or 3.4x forward EV/EBITDA. Dive into our free research report to see why there are better opportunities than BMBL.
American Woodmark (AMWD)
Market Cap: $763 million
Starting as a small millwork shop, American Woodmark (NASDAQ:AMWD) is a cabinet manufacturing company that helps customers from inspiration to installation.
Why Do We Pass on AMWD?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 9% annually over the last two years
- Forecasted revenue decline of 2.7% for the upcoming 12 months implies demand will fall even further
- Earnings per share have contracted by 6.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
At $52.61 per share, American Woodmark trades at 8.5x forward P/E. If you’re considering AMWD for your portfolio, see our FREE research report to learn more.
RadNet (RDNT)
Market Cap: $4.21 billion
With over 350 imaging facilities across seven states and a growing artificial intelligence division, RadNet (NASDAQ:RDNT) operates a network of outpatient diagnostic imaging centers across the United States, offering services like MRI, CT scans, PET scans, mammography, and X-rays.
Why Does RDNT Worry Us?
- Modest revenue base of $1.87 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- 3.9 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Low returns on capital reflect management’s struggle to allocate funds effectively
RadNet’s stock price of $55.77 implies a valuation ratio of 103.5x forward P/E. Read our free research report to see why you should think twice about including RDNT in your portfolio.
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