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.
The high-risk, high-reward nature of the Russell 2000 makes stock selection critical, and we’re here to guide you toward the right ones. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Yext (YEXT)
Market Cap: $1.07 billion
Built to solve the problem of inconsistent business information scattered across the internet, Yext (NYSE: YEXT) provides a digital presence platform that helps businesses manage their information across websites, maps, apps, and search engines.
Why Should You Sell YEXT?
- ARR growth averaged a weak 9.1% over the last year, suggesting that competition is pulling some attention away from its software
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 3.4 percentage points
Yext is trading at $8.65 per share, or 2.5x forward price-to-sales. Check out our free in-depth research report to learn more about why YEXT doesn’t pass our bar.
nLIGHT (LASR)
Market Cap: $1.40 billion
Founded by a former CEO and Harvard-educated entrepreneur Scott Keeneyn, nLIGHT (NASDAQ: LASR) offers semiconductor and fiber lasers to the industrial, aerospace & defense, and medical sectors.
Why Do We Avoid LASR?
- Annual sales declines of 1.6% for the past two years show its products and services struggled to connect with the market during this cycle
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6.4 percentage points
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $27.50 per share, nLIGHT trades at 5.6x forward price-to-sales. If you’re considering LASR for your portfolio, see our FREE research report to learn more.
Karat Packaging (KRT)
Market Cap: $490.5 million
Founded as Lollicup, Karat Packaging (NASDAQ: KRT) distributes and manufactures environmentally-friendly disposable foodservice packaging solutions.
Why Does KRT Worry Us?
- Sales trends were unexciting over the last two years as its 4.2% annual growth was below the typical industrials company
- Revenue growth over the past two years was nullified by the company’s new share issuances as its earnings per share fell by 2.9% annually
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 5.9% for the last five years
Karat Packaging’s stock price of $24.73 implies a valuation ratio of 16.5x forward P/E. Dive into our free research report to see why there are better opportunities than KRT.
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