The Russell 2000 (^RUT) is packed with potential breakout stocks, thanks to its focus on smaller companies with high growth potential. However, smaller size also means these businesses often lack the resilience and financial flexibility of large-cap firms, making careful selection crucial.
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.
Agilysys (AGYS)
Market Cap: $2.93 billion
Originally a subsidiary of Pioneer-Standard Electronics that distributed electronic components, Agilysys (NASDAQ: AGYS) offers a software-as-service platform that helps hotels, resorts, restaurants, and other hospitality businesses manage their operations and workflows.
Why Do We Think Twice About AGYS?
- Sales trends were unexciting over the last three years as its 19.2% annual growth was below the typical software company
- Gross margin of 62.4% reflects its relatively high servicing costs
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 1.1 percentage points
Agilysys is trading at $104.01 per share, or 9.6x forward price-to-sales. Check out our free in-depth research report to learn more about why AGYS doesn’t pass our bar.
Torrid (CURV)
Market Cap: $541.5 million
Promoting a message of body positivity and inclusiveness, Torrid Holdings (NYSE: CURV) is a plus-size women’s apparel and accessories retailer.
Why Do We Avoid CURV?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Modest revenue base of $1.10 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Earnings per share have contracted by 61.5% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Torrid’s stock price of $5.19 implies a valuation ratio of 22.6x forward P/E. To fully understand why you should be careful with CURV, check out our full research report (it’s free).
Surgery Partners (SGRY)
Market Cap: $2.93 billion
With more than 180 locations across 33 states serving as alternatives to traditional hospital settings, Surgery Partners (NASDAQ: SGRY) operates a national network of outpatient surgical facilities including ambulatory surgery centers and short-stay surgical hospitals.
Why Is SGRY Not Exciting?
- Underwhelming unit sales over the past two years imply it may need to invest in improvements to get back on track
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6 percentage points
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $22.68 per share, Surgery Partners trades at 21.1x forward P/E. Check out our free in-depth research report to learn more about why SGRY doesn’t pass our bar.
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