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.
The high-risk, high-reward nature of the Russell 2000 makes stock selection critical, and we’re here to guide you toward the right ones. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Yelp (YELP)
Market Cap: $1.13 billion
Founded by PayPal alumni Jeremy Stoppelman and Russel Simmons, Yelp (NYSE: YELP) is an online platform that helps people discover local businesses through crowd-sourced reviews.
Why Are We Cautious About YELP?
- Annual revenue growth of 5.1% over the last three years was below our standards for the consumer internet sector
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- High marketing expenses suggest it needs to spend heavily on new customer acquisition to sustain momentum
At $20.77 per share, Yelp trades at 3.9x forward EV/EBITDA. If you’re considering YELP for your portfolio, see our FREE research report to learn more.
10x Genomics (TXG)
Market Cap: $9.47 billion
Founded in 2012 by scientists seeking to overcome limitations in traditional biological research methods, 10x Genomics (NASDAQ: TXG) develops instruments, consumables, and software that enable researchers to analyze biological systems at single-cell resolution and spatial context.
Why Do We Steer Clear of TXG?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.2% annually over the last two years
- Revenue base of $616.9 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Push for growth has led to negative returns on capital, signaling value destruction
10x Genomics’s stock price of $72.75 implies a valuation ratio of 1,653.1x forward P/E. Check out our free in-depth research report to learn more about why TXG doesn’t pass our bar.
Seadrill (SDRL)
Market Cap: $2.99 billion
Operating in water depths reaching 12,000 feet below the surface, Seadrill (NYSE: SDRL) owns and operates drillships and semi-submersible rigs that drill oil and gas wells in deepwater offshore locations.
Why Is SDRL Risky?
- Annual sales declines of 8.6% for the past ten years show its products and services struggled to connect with the market during this cycle
- Gross margin of 36.3% is below its competitors, leaving less money to invest in exploration and production
- Cash burn makes us question whether it can achieve sustainable long-term growth
Seadrill is trading at $48.84 per share, or 26.7x forward P/E. To fully understand why you should be careful with SDRL, check out our full research report (it’s free).
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