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. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Xponential Fitness (XPOF)
Market Cap: $301.8 million
Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE: XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.
Why Should You Dump XPOF?
- Annual revenue growth of 2.5% over the last two years was below our standards for the consumer discretionary sector
- Low free cash flow margin of 2.3% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $8.58 per share, Xponential Fitness trades at 13.4x forward P/E. If you’re considering XPOF for your portfolio, see our FREE research report to learn more.
Hyster-Yale Materials Handling (HY)
Market Cap: $660.8 million
Playing a significant role in the development of the hydraulic lift truck, Hyster-Yale (NYSE: HY) designs, manufactures, and sells materials handling equipment to various sectors.
Why Is HY Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2% annually over the last two years
- Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 2.6% annually
Hyster-Yale Materials Handling is trading at $37.29 per share, or 14.6x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why HY doesn’t pass our bar.
United Natural Foods (UNFI)
Market Cap: $2.36 billion
With a vast network of 55 distribution centers spanning approximately 30 million square feet of warehouse space, United Natural Foods (NYSE: UNFI) is North America's premier grocery wholesaler distributing natural, organic, and conventional products to over 30,000 retail locations across the US and Canada.
Why Do We Avoid UNFI?
- Annual sales growth of 2.5% over the last three years lagged behind its consumer staples peers as its large revenue base made it difficult to generate incremental demand
- Performance over the past three years shows its incremental sales were much less profitable, as its earnings per share fell by 37.9% annually
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
United Natural Foods’s stock price of $39.18 implies a valuation ratio of 17.7x forward P/E. Read our free research report to see why you should think twice about including UNFI in your portfolio.
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