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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Appian (APPN)
Market Cap: $2.71 billion
Powering billions of transactions daily since its founding in 1999, Appian (NASDAQ: APPN) provides a low-code platform that helps businesses automate complex processes and operationalize artificial intelligence without extensive programming knowledge.
Why Does APPN Worry Us?
- Estimated sales growth of 12.2% for the next 12 months implies demand will slow from its two-year trend
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Operating profits increased over the last year as the company gained some leverage on its fixed costs and became more efficient
At $37.65 per share, Appian trades at 2.9x forward price-to-sales. If you’re considering APPN for your portfolio, see our FREE research report to learn more.
Kontoor Brands (KTB)
Market Cap: $3.47 billion
Founded in 2019 after separating from VF Corporation, Kontoor Brands (NYSE: KTB) is a clothing company known for its high-quality denim products.
Why Do We Think KTB Will Underperform?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 14.6% for the last two years
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Kontoor Brands’s stock price of $63.54 implies a valuation ratio of 10.7x forward P/E. Check out our free in-depth research report to learn more about why KTB doesn’t pass our bar.
HighPeak Energy (HPK)
Market Cap: $1.00 billion
Operating in the oil-rich northeastern corner of the Midland Basin where Howard and Borden counties meet, HighPeak Energy (NASDAQ: HPK) explores for, develops, and produces crude oil, natural gas liquids, and natural gas.
Why Are We Wary of HPK?
- Revenue base of $893.8 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Efficiency has decreased over the last five years as its EBITDA margin fell by 18.5 percentage points
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
HighPeak Energy is trading at $7.95 per share, or 3.8x forward EV-to-EBITDA. To fully understand why you should be careful with HPK, check out our full research report (it’s free).
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