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.
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.
KB Home (KBH)
Market Cap: $3.90 billion
The first homebuilder to be listed on the NYSE, KB Home (NYSE: KB) is a homebuilding company targeting the first-time home buyer and move-up buyer markets.
Why Do We Think KBH Will Underperform?
- Backlog has dropped by 20.4% on average over the past two years, suggesting it’s losing orders as competition picks up
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $60.14 per share, KB Home trades at 10.3x forward P/E. Read our free research report to see why you should think twice about including KBH in your portfolio.
Meritage Homes (MTH)
Market Cap: $4.70 billion
Originally founded in 1985 in Arizona as Monterey Homes, Meritage Homes (NYSE: MTH) is a homebuilder specializing in designing and constructing energy-efficient and single-family homes in the US.
Why Should You Sell MTH?
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 34.4% declines over the past two years
- Sales were less profitable over the last two years as its earnings per share fell by 16.8% annually, worse than its revenue declines
- Diminishing returns on capital suggest its earlier profit pools are drying up
Meritage Homes is trading at $66.93 per share, or 9.7x forward P/E. If you’re considering MTH for your portfolio, see our FREE research report to learn more.
CoreCivic (CXW)
Market Cap: $1.80 billion
Originally founded in 1983 as the first private prison company in the United States, CoreCivic (NYSE: CXW) operates correctional facilities, detention centers, and residential reentry programs for government agencies across the United States.
Why Does CXW Give Us Pause?
- Sluggish trends in its average available beds suggest customers aren’t adopting its solutions as quickly as the company hoped
- Free cash flow margin shrank by 9.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Low returns on capital reflect management’s struggle to allocate funds effectively
CoreCivic’s stock price of $17.19 implies a valuation ratio of 12.5x forward P/E. To fully understand why you should be careful with CXW, check out our full research report (it’s free for active Edge members).
High-Quality Stocks for All Market Conditions
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