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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Photronics (PLAB)
Market Cap: $1.39 billion
Sporting a global footprint of facilities, Photronics (NASDAQ: PLAB) is a manufacturer of photomasks, templates used to transfer patterns onto semiconductor wafers.
Why Is PLAB Not Exciting?
- Sales are projected to be flat over the next 12 months and imply weak demand
- Gross margin of 36.2% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $23.85 per share, Photronics trades at 12.5x forward P/E. To fully understand why you should be careful with PLAB, check out our full research report (it’s free for active Edge members).
Griffon (GFF)
Market Cap: $3.58 billion
Initially in the defense industry, Griffon (NYSE: GFF) is a now diversified company specializing in home improvement, professional equipment, and building products.
Why Do We Think Twice About GFF?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.4% annually over the last two years
- Projected sales for the next 12 months are flat and suggest demand will be subdued
Griffon’s stock price of $76.83 implies a valuation ratio of 12.8x forward P/E. Read our free research report to see why you should think twice about including GFF in your portfolio.
Covenant Logistics (CVLG)
Market Cap: $551.4 million
Started with 25 trucks and 50 trailers, Covenant Logistics (NASDAQ: CVLG) is a provider of expedited long haul freight services, offering a range of logistics solutions.
Why Do We Think CVLG Will Underperform?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Free cash flow margin shrank by 20.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Covenant Logistics is trading at $22.04 per share, or 11.8x forward P/E. Dive into our free research report to see why there are better opportunities than CVLG.
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