Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
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 avoid and better alternatives to consider.
Sprout Social (SPT)
Market Cap: $802.8 million
Born from the recognition that businesses needed a centralized way to handle their growing social media presence, Sprout Social (NASDAQ: SPT) provides a comprehensive software platform that helps businesses manage, analyze, and optimize their presence across various social media networks.
Why Do We Think Twice About SPT?
- Track record of operating margin losses stem from its decision to pursue growth instead of profits
- Low free cash flow margin of 7.6% for the last year gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $14 per share, Sprout Social trades at 1.7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than SPT.
The Marzetti Company (MZTI)
Market Cap: $5.04 billion
Known for its frozen garlic bread and Parkerhouse rolls, The Marzetti Company (NASDAQ: MZTI) sells bread, dressing, and dips to the retail and food service channels.
Why Are We Cautious About MZTI?
- 4.4% annual revenue growth over the last three years was slower than its consumer staples peers
- Subscale operations are evident in its revenue base of $1.91 billion, meaning it has fewer distribution channels than its larger rivals
- Estimated sales growth of 1.6% for the next 12 months implies demand will slow from its three-year trend
The Marzetti Company is trading at $183.02 per share, or 25.5x forward P/E. If you’re considering MZTI for your portfolio, see our FREE research report to learn more.
Leggett & Platt (LEG)
Market Cap: $1.30 billion
Founded in 1883, Leggett & Platt (NYSE: LEG) is a diversified manufacturer of products and components for various industries.
Why Should You Dump LEG?
- Flat sales over the last five years suggest it must innovate and find new ways to grow
- Sales over the last five years were less profitable as its earnings per share fell by 11.8% annually while its revenue was flat
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Leggett & Platt’s stock price of $9.59 implies a valuation ratio of 8.3x forward P/E. To fully understand why you should be careful with LEG, check out our full research report (it’s free).
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