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.
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 to avoid and better alternatives to consider.
Shoals (SHLS)
Market Cap: $852.6 million
Started in Huntsville, Alabama, Shoals (NASDAQ: SHLS) designs and manufactures products that make solar energy systems work more efficiently.
Why Are We Hesitant About SHLS?
- Backlog growth averaged a weak 2.7% over the past two years, suggesting it may need to tweak its product roadmap or go-to-market strategy
- Earnings per share have contracted by 2% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Shoals’s stock price of $5.13 implies a valuation ratio of 11.9x forward P/E. Dive into our free research report to see why there are better opportunities than SHLS.
Genco (GNK)
Market Cap: $580 million
Headquartered in NYC, Genco (NYSE: GNK) is a shipping company that transports dry bulk cargo along worldwide maritime routes.
Why Do We Steer Clear of GNK?
- Number of owned vessels has disappointed over the past two years, indicating weak demand for its offerings
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Free cash flow margin dropped by 6.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Genco is trading at $13.50 per share, or 20.6x forward P/E. Check out our free in-depth research report to learn more about why GNK doesn’t pass our bar.
AMC Entertainment (AMC)
Market Cap: $1.45 billion
With a profile that was raised due to meme stock mania beginning in 2021, AMC Entertainment (NYSE: AMC) operates movie theaters primarily in the US and Europe.
Why Does AMC Give Us Pause?
- Annual sales declines of 2.7% for the past five years show its products and services struggled to connect with the market
- Negative free cash flow raises questions about the return timeline for its investments
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
At $3.37 per share, AMC Entertainment trades at 2.4x forward EV-to-EBITDA. To fully understand why you should be careful with AMC, check out our full research report (it’s free).
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