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 to steer clear of and some alternatives to watch instead.
Calavo (CVGW)
Market Cap: $469.1 million
A trailblazer in the avocado industry, Calavo Growers (NASDAQ: CVGW) is a pioneering California-based provider of high-quality avocados and other fresh food products.
Why Are We Out on CVGW?
- Products aren't resonating with the market as its revenue declined by 15.8% annually over the last three years
- Forecasted revenue decline of 1.8% for the upcoming 12 months implies demand will fall even further
- Commoditized products, bad unit economics, and high competition are reflected in its low gross margin of 10.5%
Calavo is trading at $26.35 per share, or 13.8x forward P/E. Dive into our free research report to see why there are better opportunities than CVGW.
Kratos (KTOS)
Market Cap: $9.88 billion
Established with a commitment to supporting national security, Kratos (NASDAQ: KTOS) is a provider of advanced engineering, technology, and security solutions tailored for critical national security applications.
Why Does KTOS Fall Short?
- 7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Kratos’s stock price of $58.70 implies a valuation ratio of 108.1x forward P/E. To fully understand why you should be careful with KTOS, check out our full research report (it’s free).
Maximus (MMS)
Market Cap: $4.16 billion
With nearly 50 years of experience translating public policy into operational programs that serve millions of citizens, Maximus (NYSE: MMS) provides operational services, clinical assessments, and technology solutions to government agencies in the U.S. and internationally.
Why Are We Wary of MMS?
- Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
- 5.9 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Underwhelming 12.8% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its falling returns suggest its earlier profit pools are drying up
At $73.86 per share, Maximus trades at 11.5x forward P/E. Check out our free in-depth research report to learn more about why MMS doesn’t pass our bar.
High-Quality Stocks for All Market Conditions
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