The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.
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 steer clear of and some alternatives to watch instead.
AeroVironment (AVAV)
Market Cap: $10.88 billion
Focused on the future of autonomous military combat, AeroVironment (NASDAQ: AVAV) specializes in advanced unmanned aircraft systems and electric vehicle charging solutions.
Why Are We Wary of AVAV?
- Efficiency has decreased over the last five years as its operating margin fell by 15.3 percentage points
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 8.4% annually while its revenue grew
- Free cash flow margin shrank by 6.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
AeroVironment is trading at $216.60 per share, or 57x forward P/E. Dive into our free research report to see why there are better opportunities than AVAV.
Covenant Logistics (CVLG)
Market Cap: $634.1 million
Started with 25 trucks and 50 trailers, Covenant Logistics (NASDAQ: CVLG) is a provider of expedited long haul freight services, offering a range of logistics solutions.
Why Is CVLG Risky?
- Sales trends were unexciting over the last two years as its 2.7% annual growth was below the typical industrials company
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.9 percentage points
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Covenant Logistics’s stock price of $25.29 implies a valuation ratio of 13.8x forward P/E. To fully understand why you should be careful with CVLG, check out our full research report (it’s free).
Cogent (CCOI)
Market Cap: $922.3 million
Operating a massive network spanning 20,000 miles of fiber optic cable and connecting to over 3,200 buildings worldwide, Cogent Communications (NASDAQ: CCOI) provides high-speed Internet access, private network services, and data center colocation to businesses and bandwidth-intensive organizations across 54 countries.
Why Do We Steer Clear of CCOI?
- Annual revenue growth of 1.8% over the last two years was below our standards for the business services sector
- Eroding returns on capital suggest its historical profit centers are aging
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
At $19.57 per share, Cogent trades at 9.8x forward EV-to-EBITDA. If you’re considering CCOI for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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