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 to steer clear of and some alternatives to watch instead.
LiveRamp (RAMP)
Market Cap: $1.86 billion
Serving as the digital middleman in an increasingly privacy-conscious world, LiveRamp (NYSE: RAMP) provides technology that helps companies securely share and connect their customer data with trusted partners while maintaining privacy compliance.
Why Are We Wary of RAMP?
- Customers were hesitant to make long-term commitments to its software as its 8.9% average ARR growth over the last year was sluggish
- Estimated sales growth of 7.7% for the next 12 months implies demand will slow from its two-year trend
- Operating margin expanded by 1.8 percentage points over the last year as it scaled and became more efficient
LiveRamp is trading at $28.66 per share, or 2.3x forward price-to-sales. To fully understand why you should be careful with RAMP, check out our full research report (it’s free for active Edge members).
Ducommun (DCO)
Market Cap: $1.45 billion
California’s oldest company, Ducommun (NYSE: DCO) is a provider of engineering and manufacturing services for high-performance products primarily within the aerospace and defense industries.
Why Do We Think Twice About DCO?
- New orders were hard to come by as its average backlog growth of 3.8% over the past two years underwhelmed
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.4% for the last five years
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $97.46 per share, Ducommun trades at 23.9x forward P/E. If you’re considering DCO for your portfolio, see our FREE research report to learn more.
Navient (NAVI)
Market Cap: $1.24 billion
Spun off from Sallie Mae in 2014 to handle the company's loan servicing and collection operations, Navient (NASDAQ: NAVI) provides education loan servicing and business processing solutions that help manage federal student loans, private education loans, and government services.
Why Should You Dump NAVI?
- Sales tumbled by 13% annually over the last five years, showing market trends are working against its favor during this cycle
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
- Debt-to-equity ratio of 18.5× is concerningly high, indicating excessive leverage that could limit financial flexibility
Navient’s stock price of $12.44 implies a valuation ratio of 10.4x forward P/E. Read our free research report to see why you should think twice about including NAVI in your portfolio.
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