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.
The high-risk, high-reward nature of the Russell 2000 makes stock selection critical, and we’re here to guide you toward the right ones. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
Laureate Education (LAUR)
Market Cap: $3.35 billion
Founded in 1998 by Douglas L. Becker and based in Miami, Laureate Education (NASDAQ: LAUR) is a global network of higher education institutions.
Why Are We Cautious About LAUR?
- Demand for its offerings was relatively low as its number of enrolled students has underwhelmed
- Flat earnings per share over the last five years lagged its peers
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Laureate Education is trading at $22.48 per share, or 15x forward P/E. If you’re considering LAUR for your portfolio, see our FREE research report to learn more.
Resideo (REZI)
Market Cap: $3.12 billion
Resideo Technologies, Inc. (NYSE: REZI) is a manufacturer and distributor of technology-driven products and solutions for home comfort, energy management, water management, and safety and security.
Why Are We Wary of REZI?
- Sales trends were unexciting over the last two years as its 4.8% annual growth was below the typical industrials company
- Estimated sales growth of 4.4% for the next 12 months is soft and implies weaker demand
- Waning returns on capital imply its previous profit engines are losing steam
At $21.38 per share, Resideo trades at 5.2x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than REZI.
Fastly (FSLY)
Market Cap: $978.8 million
Founded in 2011, Fastly (NYSE: FSLY) provides content delivery and edge cloud computing services, enabling enterprises and developers to deliver fast, secure, and scalable digital content and experiences.
Why Are We Out on FSLY?
- Sales trends were unexciting over the last three years as its 14.3% annual growth was below the typical software company
- Sky-high servicing costs result in an inferior gross margin of 54% that must be offset through increased usage
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Fastly’s stock price of $6.81 implies a valuation ratio of 1.6x forward price-to-sales. Read our free research report to see why you should think twice about including FSLY in your portfolio.
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