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. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Peloton (PTON)
Market Cap: $3.09 billion
Started as a Kickstarter campaign, Peloton (NASDAQ: PTON) is a fitness technology company known for its at-home exercise equipment and interactive online workout classes.
Why Do We Steer Clear of PTON?
- Demand for its offerings was relatively low as its number of connected fitness subscribers has underwhelmed
- Persistent operating margin losses suggest the business manages its expenses poorly
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 2.7 percentage points over the next year
Peloton’s stock price of $7.59 implies a valuation ratio of 8.5x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than PTON.
Boise Cascade (BCC)
Market Cap: $3.32 billion
Formed through the merger of two lumber companies, Boise Cascade Company (NYSE: BCC) manufactures and distributes wood products and other building materials.
Why Do We Think BCC Will Underperform?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.2% annually over the last two years
- Free cash flow margin dropped by 5.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Waning returns on capital imply its previous profit engines are losing steam
At $88.85 per share, Boise Cascade trades at 13.1x forward P/E. To fully understand why you should be careful with BCC, check out our full research report (it’s free).
Benchmark (BHE)
Market Cap: $1.47 billion
Operating as a critical behind-the-scenes partner for complex technology products since 1979, Benchmark Electronics (NYSE: BHE) provides advanced manufacturing, engineering, and technology solutions for original equipment manufacturers across aerospace, medical, industrial, and technology sectors.
Why Are We Hesitant About BHE?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 6.3% annually over the last two years
- Low free cash flow margin of 0.8% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Underwhelming 7.3% return on capital reflects management’s difficulties in finding profitable growth opportunities
Benchmark is trading at $40.95 per share, or 16.5x forward P/E. If you’re considering BHE for your portfolio, see our FREE research report to learn more.
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