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. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Polaris (PII)
Market Cap: $3.92 billion
Founded in 1954, Polaris (NYSE: PII) designs and manufactures high-performance off-road vehicles, snowmobiles, and motorcycles.
Why Do We Steer Clear of PII?
- Products and services fail to spark excitement with consumers, as seen in its flat sales over the last five years
- Projected 3.2 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Polaris is trading at $68.84 per share, or 51.5x forward P/E. To fully understand why you should be careful with PII, check out our full research report (it’s free).
Columbus McKinnon (CMCO)
Market Cap: $400.1 million
With 19 different brands across the globe, Columbus McKinnon (NASDAQ: CMCO) offers material handling equipment for the construction, manufacturing, and transportation industries.
Why Are We Out on CMCO?
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 16.9% annually
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 17.7 percentage points
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Columbus McKinnon’s stock price of $14.30 implies a valuation ratio of 8.7x forward P/E. Read our free research report to see why you should think twice about including CMCO in your portfolio.
UFP Technologies (UFPT)
Market Cap: $1.74 billion
With expertise dating back to 1963 in specialized materials and precision manufacturing, UFP Technologies (NASDAQ: UFPT) designs and manufactures custom solutions for medical devices, sterile packaging, and other highly engineered products for healthcare and industrial applications.
Why Does UFPT Give Us Pause?
- Smaller revenue base of $608.9 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Static adjusted operating margin over the last two years shows it couldn’t become more efficient
At $224.54 per share, UFP Technologies trades at 20.8x forward P/E. If you’re considering UFPT for your portfolio, see our FREE research report to learn more.
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