Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Kulicke and Soffa (KLIC)
Market Cap: $2.42 billion
Headquartered in Singapore, Kulicke & Soffa (NASDAQ: KLIC) is a provider of production equipment and tools used to assemble semiconductor devices
Why Do We Think Twice About KLIC?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 27.7 percentage points
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 26.9% annually
At $46.40 per share, Kulicke and Soffa trades at 30.4x forward P/E. To fully understand why you should be careful with KLIC, check out our full research report (it’s free for active Edge members).
Marcus & Millichap (MMI)
Market Cap: $1.08 billion
Founded in 1971, Marcus & Millichap (NYSE: MMI) specializes in commercial real estate investment sales, financing, research, and advisory services.
Why Are We Out on MMI?
- Muted 1.3% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Poor free cash flow margin of 3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Marcus & Millichap is trading at $27.83 per share, or 55.9x forward P/E. Dive into our free research report to see why there are better opportunities than MMI.
Graham Corporation (GHM)
Market Cap: $711.9 million
Founded when its founder patented a unique design for a vacuum system used in the sugar refining process, Graham (NYSE: GHM) provides vacuum and heat transfer equipment for the energy, petrochemical, refining, and chemical sectors.
Why Are We Cautious About GHM?
- Poor expense management has led to an operating margin of 2.3% that is below the industry average
- Low returns on capital reflect management’s struggle to allocate funds effectively
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Graham Corporation’s stock price of $64.71 implies a valuation ratio of 41.9x forward P/E. Read our free research report to see why you should think twice about including GHM in your portfolio.
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