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 that don’t make the cut and some better choices instead.
Topgolf Callaway (MODG)
Market Cap: $1.82 billion
Formed between the merger of Callaway and Topgolf, Topgolf Callaway (NYSE: MODG) sells golf equipment and operates technology-driven golf entertainment venues.
Why Do We Pass on MODG?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Earnings per share fell by 39.2% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $9.86 per share, Topgolf Callaway trades at 4x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why MODG doesn’t pass our bar.
Hub Group (HUBG)
Market Cap: $2.2 billion
Started with $10,000, Hub Group (NASDAQ: HUBG) is a provider of intermodal, truck brokerage, and logistics services, facilitating transportation solutions for businesses worldwide.
Why Do We Avoid HUBG?
- Flat unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
- Sales were less profitable over the last two years as its earnings per share fell by 37.1% annually, worse than its revenue declines
- Waning returns on capital imply its previous profit engines are losing steam
Hub Group is trading at $35.93 per share, or 16.9x forward P/E. Dive into our free research report to see why there are better opportunities than HUBG.
Luxfer (LXFR)
Market Cap: $336.7 million
With its magnesium alloys used in the construction of the famous Spirit of St. Louis aircraft, Luxfer (NYSE: LXFR) offers specialized materials, components, and gas containment devices to various industries.
Why Should You Dump LXFR?
- Sales tumbled by 1.9% annually over the last two years, showing market trends are working against its favor during this cycle
- Free cash flow margin dropped by 7.8 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Luxfer’s stock price of $12.59 implies a valuation ratio of 11.4x forward P/E. To fully understand why you should be careful with LXFR, check out our full research report (it’s free).
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