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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
National Vision (EYE)
Market Cap: $2.31 billion
Operating under multiple brands, National Vision (NYSE: EYE) sells optical products such as eyeglasses and provides optical services such as eye exams.
Why Are We Wary of EYE?
- Reduction in its number of stores signals a focus on profitability through targeted consolidation
- Poor expense management has led to an operating margin of 0.6% that is below the industry average
- ROIC of 3.6% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
National Vision is trading at $29.40 per share, or 36.5x forward P/E. To fully understand why you should be careful with EYE, check out our full research report (it’s free).
Connection (CNXN)
Market Cap: $1.57 billion
Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ: CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.
Why Do We Think CNXN Will Underperform?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.3% annually over the last two years
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 6.1% annually
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.3% for the last five years
Connection’s stock price of $61.99 implies a valuation ratio of 17.2x forward P/E. Check out our free in-depth research report to learn more about why CNXN doesn’t pass our bar.
CNO Financial Group (CNO)
Market Cap: $3.83 billion
Rebranded from Conseco in 2010 to signal a fresh start after navigating financial challenges, CNO Financial Group (NYSE: CNO) develops and markets health insurance, annuities, and life insurance products primarily targeting middle-income pre-retirees and retirees.
Why Are We Cautious About CNO?
- Net premiums earned remained stagnant over the last five years, indicating expansion challenges this cycle
- Costs have risen faster than its revenue over the last four years, causing its pre-tax profit margin to decline by 7.3 percentage points
- Book value per share tumbled by 4.9% annually over the last five years, showing insurance sector trends are working against its favor during this cycle
At $39.55 per share, CNO Financial Group trades at 1.5x forward P/B. Dive into our free research report to see why there are better opportunities than CNO.
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