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 to avoid and better alternatives to consider.
Genesco (GCO)
Market Cap: $389.1 million
Spanning a broad range of styles, brands, and prices, Genesco (NYSE:GCO) sells footwear, apparel, and accessories through multiple brands and banners.
Why Do We Steer Clear of GCO?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- High net-debt-to-EBITDA ratio of 7× could force the company to raise capital on unfavorable terms if market conditions deteriorate
Genesco is trading at $35.07 per share, or 13.1x forward P/E. To fully understand why you should be careful with GCO, check out our full research report (it’s free).
Laureate Education (LAUR)
Market Cap: $5.29 billion
Founded in 1998 by Douglas L. Becker and based in Miami, Laureate Education (NASDAQ:LAUR) is a global network of higher education institutions.
Why Do We Avoid LAUR?
- Demand for its offerings was relatively low as its number of enrolled students has underwhelmed
- Free cash flow margin is forecasted to shrink by 1.8 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $38.38 per share, Laureate Education trades at 17.1x forward P/E. Check out our free in-depth research report to learn more about why LAUR doesn’t pass our bar.
RadNet (RDNT)
Market Cap: $5.94 billion
With over 350 imaging facilities across seven states and a growing artificial intelligence division, RadNet (NASDAQ:RDNT) operates a network of outpatient diagnostic imaging centers across the United States, offering services like MRI, CT scans, PET scans, mammography, and X-rays.
Why Is RDNT Not Exciting?
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 7.8% annually while its revenue grew
- Low free cash flow margin of 1.9% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its shrinking returns suggest its past profit sources are losing steam
RadNet’s stock price of $75.59 implies a valuation ratio of 107.3x forward P/E. Dive into our free research report to see why there are better opportunities than RDNT.
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