The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.
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.
Monro (MNRO)
Market Cap: $527.7 million
Started as a single location in Rochester, New York, Monro (NASDAQ: MNRO) provides common auto services such as brake repairs, tire replacements, and oil changes.
Why Do We Steer Clear of MNRO?
- Store closures and disappointing same-store sales suggest demand is sluggish and it’s rightsizing its operations
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 30.4% annually, worse than its revenue
Monro is trading at $17.56 per share, or 30.4x forward P/E. Dive into our free research report to see why there are better opportunities than MNRO.
American Outdoor Brands (AOUT)
Market Cap: $120.9 million
Spun off from Smith and Wesson in 2020, American Outdoor Brands (NASDAQ: AOUT) is an outdoor and recreational products company that offers outdoor and shooting sports products but does not sell firearms themselves.
Why Should You Sell AOUT?
- Annual sales declines of 4.3% for the past five years show its products and services struggled to connect with the market
- Low free cash flow margin of 1.3% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $9.57 per share, American Outdoor Brands trades at 36.2x forward P/E. Check out our free in-depth research report to learn more about why AOUT doesn’t pass our bar.
Tandem Diabetes (TNDM)
Market Cap: $1.33 billion
With technology that automatically adjusts insulin delivery based on continuous glucose monitoring data, Tandem Diabetes Care (NASDAQ: TNDM) develops and manufactures automated insulin delivery systems that help people with diabetes manage their blood glucose levels.
Why Do We Pass on TNDM?
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 18.5% 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
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
Tandem Diabetes’s stock price of $19.58 implies a valuation ratio of 25.7x forward EV-to-EBITDA. To fully understand why you should be careful with TNDM, check out our full research report (it’s free).
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