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.
L.B. Foster (FSTR)
Market Cap: $205.8 million
Founded with a $2,500 loan, L.B. Foster (NASDAQ: FSTR) is a provider of products and services for the transportation and energy infrastructure sectors, including rail products, construction materials, and coating solutions.
Why Should You Sell FSTR?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.3% annually over the last five years
- Low free cash flow margin of 0.4% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- ROIC of 4.7% reflects management’s challenges in identifying attractive investment opportunities
L.B. Foster’s stock price of $19.49 implies a valuation ratio of 4.6x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why FSTR doesn’t pass our bar.
CoreCivic (CXW)
Market Cap: $2.25 billion
Originally founded in 1983 as the first private prison company in the United States, CoreCivic (NYSE: CXW) operates correctional facilities, detention centers, and residential reentry programs for government agencies across the United States.
Why Is CXW Risky?
- Performance surrounding its average available beds has lagged its peers
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 10.2 percentage points
At $20.67 per share, CoreCivic trades at 23.2x forward P/E. To fully understand why you should be careful with CXW, check out our full research report (it’s free).
Ladder Capital (LADR)
Market Cap: $1.36 billion
Founded during the 2008 financial crisis when traditional lenders retreated from commercial real estate, Ladder Capital (NYSE: LADR) is a real estate investment trust that originates commercial real estate loans, owns commercial properties, and invests in real estate securities.
Why Do We Pass on LADR?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 12.9% annually over the last two years
- Earnings per share fell by 6% annually over the last five years while its revenue was flat, showing each sale was less profitable
- Flat tangible book value per share over the last two years suggest it must find different ways to enhance shareholder value during this cycle
Ladder Capital is trading at $10.60 per share, or 0.9x forward P/B. Check out our free in-depth research report to learn more about why LADR doesn’t pass our bar.
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