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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
Nature's Sunshine (NATR)
Market cap: $177.8 million
Started on a kitchen table in Utah, Nature’s Sunshine (NASDAQ: NATR) manufactures and sells nutritional and personal care products.
Why Are We Wary of NATR?
- Muted 3% annual revenue growth over the last three years shows its demand lagged behind its consumer staples peers
- Modest revenue base of $480.3 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Free cash flow margin shrank by 4.4 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
Nature's Sunshine’s stock price of $10.25 implies a valuation ratio of 12.2x forward P/E. If you’re considering NATR for your portfolio, see our FREE research report to learn more.
Herc (HRI)
Market cap: $5.01 billion
Formerly a subsidiary of Hertz Corporation and with a logo that still bears some similarities to its former parent, Herc Holdings (NYSE: HRI) provides equipment rental and related services to a wide range of industries.
Why Do We Think Twice About HRI?
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 6.2 percentage points
- Earnings per share fell by 22.1% annually over the last two years while its revenue grew, partly because it diluted shareholders
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $149.81 per share, Herc trades at 12.8x forward P/E. Read our free research report to see why you should think twice about including HRI in your portfolio.
BrightView (BV)
Market cap: $1.09 billion
An official field consultant for Major League Baseball, BrightView (NYSE: BV) offers landscaping design, development, and maintenance.
Why Do We Pass on BV?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 15.3% annually while its revenue grew
- ROIC of 2.9% reflects management’s challenges in identifying attractive investment opportunities
BrightView is trading at $11.79 per share, or 21x forward P/E. To fully understand why you should be careful with BV, check out our full research report (it’s free).
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