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. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Tenable (TENB)
Market cap: $4.62 billion
Starting with the widely-used Nessus vulnerability scanner first released in 1998, Tenable (NASDAQ: TENB) provides exposure management solutions that help organizations identify, assess, and prioritize cybersecurity vulnerabilities across their IT infrastructure and cloud environments.
Why Is TENB Not Exciting?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 7.8% underwhelmed
- Estimated sales growth of 7.3% for the next 12 months implies demand will slow from its two-year trend
- Operating margin expanded by 4.9 percentage points over the last year as it scaled and became more efficient
Tenable’s stock price of $43.61 implies a valuation ratio of 4.8x forward price-to-sales. Check out our free in-depth research report to learn more about why TENB doesn’t pass our bar.
AMC Networks (AMCX)
Market cap: $347.7 million
Originally the joint-venture of four cable television companies, AMC Networks (NASDAQ: AMCX) is a broadcaster producing a diverse range of television shows and movies.
Why Are We Out on AMCX?
- Annual sales declines of 5% for the past five years show its products and services struggled to connect with the market
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 3.3 percentage points over the next year
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
AMC Networks is trading at $8.42 per share, or 2.5x forward P/E. If you’re considering AMCX for your portfolio, see our FREE research report to learn more.
Distribution Solutions (DSGR)
Market cap: $1.62 billion
Founded in 1952, Distribution Solutions (NASDAQ: DSGR) provides supply chain solutions and distributes industrial, safety, and maintenance products to various industries.
Why Does DSGR Worry Us?
- Earnings per share lagged its peers over the last three years as they only grew by 2.9% annually
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging
At $34.99 per share, Distribution Solutions trades at 21x forward P/E. Read our free research report to see why you should think twice about including DSGR in your portfolio.
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