The Russell 2000 (^RUT) is full of potential stocks, thanks to its focus on small companies with high growth potential. However, their small size also means that these companies often lack the resilience and financial flexibility of large-cap companies, making careful selection crucial.
Choosing 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 to avoid and better alternatives to consider.
Market capitalization: $1.19 billion
Founded in 1883, Leggett & Platt (NYSE: LEG) is a diversified manufacturer of products and components for a variety of industries.
Why do we avoid LEG?
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Sales have remained stable over the past five years, indicating that the company has failed to grow its business.
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Earnings per share have fallen 12.7% annually over the past five years while its revenue has remained flat, showing that each sale was less profitable.
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The erosion of capital returns from an already low base indicates that management’s recent investments are destroying value.
The Leggett & Platt share price of $8.92 implies a valuation ratio of 8.1x forward P/E. If you are considering LEG for your portfolio, check out our FREE research report to learn more.
Market capitalization: $662.7 million
Founded in 1961, Kimball Electronics (NYSE: KE) is a global contract manufacturer specializing in electronics and manufacturing solutions for the automotive, medical and industrial markets.
Why do we think KE will underperform?
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The 10.8% annual sales decline over the past two years shows that its products and services have struggled to connect with the market during this cycle.
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Earnings per share have contracted 2.4% per year over the past five years, a drag on returns because stock prices often echo long-term EPS performance.
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The ability to fund investments or reward shareholders with increased buybacks or dividends is limited by its low free cash flow margin of -0.1% over the past five years.
Kimball Electronics trades at $27.23 per share, representing a forward P/E of 20.3 times. Dive into our free research report to find out why there are better opportunities than KE.
Market capitalization: $1.10 billion
Using 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 sugar levels.
Why do we avoid TNDM?
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Disappointing pump deliveries over the past two years indicate that demand is weak and the company may need to revise its strategy.
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Decreasing capital returns from an already low starting point shows that neither management’s previous nor current bets are working out as expected.
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EBITDA losses could force it to accept punitive loan terms or high-cost debt.
