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.
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.
Transcat (TRNS)
Market Cap: $502.2 million
Serving the pharmaceutical, industrial manufacturing, energy, and chemical process industries, Transcat (NASDAQ: TRNS) provides measurement instruments and supplies.
Why Are We Cautious About TRNS?
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 2.5 percentage points
- Issuance of new shares over the last two years caused its earnings per share growth of 2.7% to lag its revenue gains
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $53.84 per share, Transcat trades at 26x forward P/E. Dive into our free research report to see why there are better opportunities than TRNS.
Artivion (AORT)
Market Cap: $2.11 billion
Formerly known as CryoLife until its 2022 rebranding, Artivion (NYSE: AORT) develops and manufactures medical devices and preserves human tissues used in cardiac and vascular surgical procedures for patients with aortic disease.
Why Does AORT Fall Short?
- Modest revenue base of $422.6 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.1% for the last five years
- ROIC of 2.3% reflects management’s challenges in identifying attractive investment opportunities
Artivion is trading at $44.59 per share, or 59.9x forward P/E. Check out our free in-depth research report to learn more about why AORT doesn’t pass our bar.
Ladder Capital (LADR)
Market Cap: $1.38 billion
Founded during the 2008 financial crisis when traditional lenders retreated from commercial real estate, Ladder Capital (NYSE: LADR) is a real estate investment trust that originates commercial real estate loans, owns commercial properties, and invests in real estate securities.
Why Should You Sell LADR?
- Annual sales declines of 15.4% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
- Flat tangible book value per share over the last five years suggest it must find different ways to enhance shareholder value during this cycle
Ladder Capital’s stock price of $10.88 implies a valuation ratio of 0.9x forward P/B. If you’re considering LADR for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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