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 steer clear of and some alternatives to watch instead.
Central Garden & Pet (CENT)
Market Cap: $2.27 billion
Enhancing the lives of both pets and homeowners, Central Garden & Pet (NASDAQ: CENT) is a leading producer and distributor of essential products for pet care, lawn and garden maintenance, and pest control.
Why Are We Wary of CENT?
- Products aren’t resonating with the market as its revenue declined by 1.9% annually over the last three years
- Sales are projected to tank by 5.1% over the next 12 months as its demand continues evaporating
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Central Garden & Pet is trading at $40.84 per share, or 14x forward P/E. Dive into our free research report to see why there are better opportunities than CENT.
Titan International (TWI)
Market Cap: $508.6 million
Acquiring Goodyear’s farm tire business in 2005, Titan (NYSE: TWI) is a manufacturer and supplier of wheels, tires, and undercarriages used in off-highway vehicles such as construction vehicles.
Why Should You Sell TWI?
- Sales trends were unexciting over the last two years as its 1.7% annual growth was below the typical industrials company
- Waning returns on capital imply its previous profit engines are losing steam
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $7.89 per share, Titan International trades at 9.3x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including TWI in your portfolio.
QCR Holdings (QCRH)
Market Cap: $1.67 billion
With roots dating back to 1993 and a name reflecting its original Quad Cities market, QCR Holdings (NASDAQGM:QCRH) operates four community banks across Iowa and Missouri, providing commercial, consumer banking, and trust services to businesses and individuals.
Why Are We Hesitant About QCRH?
- Muted 9.1% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Estimated net interest income growth of 3% for the next 12 months implies demand will slow from its five-year trend
- Day-to-day expenses have swelled relative to revenue over the last five years as its efficiency ratio increased by 2.3 percentage points
QCR Holdings’s stock price of $101.51 implies a valuation ratio of 1.4x forward P/B. To fully understand why you should be careful with QCRH, check out our full research report (it’s free).
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