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.
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 avoid and better alternatives to consider.
Rapid7 (RPD)
Market Cap: $812.9 million
With its name inspired by the need for quick responses to cyber threats, Rapid7 (NASDAQ: RPD) provides cybersecurity software and services that help organizations detect vulnerabilities, monitor threats, and respond to security incidents.
Why Do We Think RPD Will Underperform?
- Billings have dropped by 2.7% over the last year, suggesting it might have to lower prices to stimulate growth
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 1.5 percentage points
Rapid7 is trading at $12.23 per share, or 1x forward price-to-sales. If you’re considering RPD for your portfolio, see our FREE research report to learn more.
Sprinklr (CXM)
Market Cap: $1.21 billion
With a proprietary AI engine processing 450 million data points daily across 30+ digital channels, Sprinklr (NYSE: CXM) provides cloud-based software that helps large enterprises manage customer experiences across social, messaging, chat, and voice channels.
Why Are We Bearish on CXM?
- Products, pricing, or go-to-market strategy may need some adjustments as its 2.2% average billings growth over the last year was weak
- Projected sales are flat for the next 12 months, implying demand will slow from its two-year trend
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
At $5.19 per share, Sprinklr trades at 1.3x forward price-to-sales. Read our free research report to see why you should think twice about including CXM in your portfolio.
World Kinect (WKC)
Market Cap: $1.83 billion
Serving over 150,000 customers from commercial jets to cargo ships to heating oil consumers, World Kinect (NYSE: WKC) procures and delivers fuel and energy products to airlines, shipping companies, trucking fleets, and industrial businesses worldwide.
Why Are We Out on WKC?
- Gross margin of 2.3% is below its competitors, leaving less money to invest in exploration and production
- Low free cash flow margin of 0.3% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
World Kinect’s stock price of $35.92 implies a valuation ratio of 12.7x forward P/E. Check out our free in-depth research report to learn more about why WKC doesn’t pass our bar.
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