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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Papa John's (PZZA)
Market Cap: $1.62 billion
Founded by the eclectic John “Papa John” Schnatter, Papa John’s (NASDAQ: PZZA) is a globally recognized pizza delivery and carryout chain known for “better ingredients” and “better pizza”.
Why Should You Sell PZZA?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
- Estimated sales growth of 2.9% for the next 12 months implies demand will slow from its six-year trend
- Gross margin of 17.3% is below its competitors, leaving less money for marketing and promotions
Papa John's is trading at $49.72 per share, or 24.4x forward P/E. If you’re considering PZZA for your portfolio, see our FREE research report to learn more.
Lincoln Educational (LINC)
Market Cap: $710.2 million
Established in 1946, Lincoln Educational (NASDAQ: LINC) is a provider of specialized technical training in the United States, offering career-oriented programs to provide practical skills required in the workforce.
Why Are We Hesitant About LINC?
- Number of enrolled students has disappointed over the past two years, indicating weak demand for its offerings
- Negative free cash flow raises questions about the return timeline for its investments
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $22.02 per share, Lincoln Educational trades at 11.5x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including LINC in your portfolio.
Wiley (WLY)
Market Cap: $2.35 billion
With roots dating back to 1807 when Charles Wiley opened a small printing shop in Manhattan, John Wiley & Sons (NYSE: WLY) is a global academic publisher that provides scientific journals, books, digital courseware, and knowledge solutions for researchers, students, and professionals.
Why Do We Steer Clear of WLY?
- Sales tumbled by 1.7% annually over the last five years, showing market trends are working against its favor during this cycle
- Free cash flow margin shrank by 6.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Underwhelming 10.9% return on capital reflects management’s difficulties in finding profitable growth opportunities
Wiley’s stock price of $43.38 implies a valuation ratio of 1.4x trailing 12-month price-to-sales. To fully understand why you should be careful with WLY, check out our full research report (it’s free).
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