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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
The Cheesecake Factory (CAKE)
Market Cap: $3.19 billion
Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ: CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.
Why Are We Hesitant About CAKE?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
- Estimated sales growth of 4.1% for the next 12 months implies demand will slow from its six-year trend
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $64.96 per share, The Cheesecake Factory trades at 15.7x forward P/E. Check out our free in-depth research report to learn more about why CAKE doesn’t pass our bar.
3D Systems (DDD)
Market Cap: $305.3 million
Founded by the inventor of stereolithography, 3D Systems (NYSE: DDD) engineers, manufactures, and sells 3D printers and other related products to the aerospace, automotive, healthcare, and consumer goods industries.
Why Do We Steer Clear of DDD?
- Sales tumbled by 6.7% annually over the last five years, showing market trends are working against its favor during this cycle
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
3D Systems’s stock price of $2.10 implies a valuation ratio of 0.7x forward price-to-sales. If you’re considering DDD for your portfolio, see our FREE research report to learn more.
Surgery Partners (SGRY)
Market Cap: $1.81 billion
With more than 180 locations across 33 states serving as alternatives to traditional hospital settings, Surgery Partners (NASDAQ: SGRY) operates a national network of outpatient surgical facilities including ambulatory surgery centers and short-stay surgical hospitals.
Why Does SGRY Worry Us?
- Weak unit sales over the past two years imply it may need to invest in improvements to get back on track
- Estimated sales growth of 2.9% for the next 12 months implies demand will slow from its two-year trend
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Surgery Partners is trading at $14.04 per share, or 41x forward P/E. Dive into our free research report to see why there are better opportunities than SGRY.
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