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. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
La-Z-Boy (LZB)
Market Cap: $1.28 billion
The prized possession of every mancave, La-Z-Boy (NYSE: LZB) is a furniture company specializing in recliners, sofas, and seats.
Why Should You Dump LZB?
- Products and services aren't resonating with the market as its revenue declined by 2.8% annually over the last two years
- Estimated sales growth of 1.9% for the next 12 months is soft and implies weaker demand
- Waning returns on capital imply its previous profit engines are losing steam
La-Z-Boy is trading at $31.14 per share, or 12.1x forward P/E. Check out our free in-depth research report to learn more about why LZB doesn’t pass our bar.
Gibraltar (ROCK)
Market Cap: $1.81 billion
Gibraltar (NASDAQ: ROCK) makes renewable energy, agriculture technology and infrastructure products. Its mission statement is to make everyday living more sustainable.
Why Are We Hesitant About ROCK?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 7.4% annually over the last two years
- Projected sales growth of 4% for the next 12 months suggests sluggish demand
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 3.1% annually
At $61.29 per share, Gibraltar trades at 13.6x forward P/E. Dive into our free research report to see why there are better opportunities than ROCK.
Redwire (RDW)
Market Cap: $1.01 billion
Based in Jacksonville, Florida, Redwire (NYSE: RDW) is a provider of systems and components used in space infrastructure.
Why Do We Avoid RDW?
- Historically negative EPS raises concerns for risk-averse investors and makes its earnings potential harder to gauge
- Free cash flow margin dropped by 14.8 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Redwire’s stock price of $6.16 implies a valuation ratio of 28.5x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including RDW in your portfolio.
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