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.
Leggett & Platt (LEG)
Market Cap: $1.19 billion
Founded in 1883, Leggett & Platt (NYSE: LEG) is a diversified manufacturer of products and components for various industries.
Why Do We Avoid LEG?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Earnings per share fell by 12.7% annually over the last five years while its revenue was flat, showing each sale was less profitable
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Leggett & Platt’s stock price of $8.92 implies a valuation ratio of 8.1x forward P/E. If you’re considering LEG for your portfolio, see our FREE research report to learn more.
Kimball Electronics (KE)
Market Cap: $662.7 million
Founded in 1961, Kimball Electronics (NYSE: KE) is a global contract manufacturer specializing in electronics and manufacturing solutions for automotive, medical, and industrial markets.
Why Do We Think KE Will Underperform?
- Annual sales declines of 10.8% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have contracted by 2.4% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.1% for the last five years
Kimball Electronics is trading at $27.23 per share, or 20.3x forward P/E. Dive into our free research report to see why there are better opportunities than KE.
Tandem Diabetes (TNDM)
Market Cap: $1.10 billion
With technology that automatically adjusts insulin delivery based on continuous glucose monitoring data, Tandem Diabetes Care (NASDAQ: TNDM) develops and manufactures automated insulin delivery systems that help people with diabetes manage their blood glucose levels.
Why Do We Steer Clear of TNDM?
- Disappointing pump shipments over the past two years indicate demand is soft and that the company may need to revise its strategy
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- EBITDA losses may force it to accept punitive lending terms or high-cost debt
At $16.22 per share, Tandem Diabetes trades at 20x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including TNDM in your portfolio.
Stocks We Like More
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