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.
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. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
OneWater (ONEW)
Market Cap: $171.4 million
A public company since early 2020, OneWater Marine (NASDAQ: ONEW) sells boats, yachts, and other marine products.
Why Do We Think ONEW Will Underperform?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Incremental sales over the last three years were much less profitable as its earnings per share fell by 53.6% annually while its revenue grew
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
OneWater’s stock price of $10.32 implies a valuation ratio of 40.6x forward P/E. Dive into our free research report to see why there are better opportunities than ONEW.
Byrna (BYRN)
Market Cap: $239.9 million
Providing civilians with tools to disable, disarm, and deter would-be assailants, Byrna (NASDAQ: BYRN) is a provider of non-lethal weapons.
Why Does BYRN Worry Us?
- Poor expense management has led to an operating margin of -0.1% that is below the industry average
- Negative free cash flow raises questions about the return timeline for its investments
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Byrna is trading at $10.89 per share, or 25.2x forward P/E. Check out our free in-depth research report to learn more about why BYRN doesn’t pass our bar.
MillerKnoll (MLKN)
Market Cap: $1.31 billion
Created through the 2021 merger of industry icons Herman Miller and Knoll, MillerKnoll (NASDAQ: MLKN) designs, manufactures, and distributes interior furnishings for offices, healthcare facilities, educational settings, and homes worldwide.
Why Is MLKN Risky?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Issuance of new shares over the last five years caused its earnings per share to fall by 8.4% annually while its revenue grew
- Low free cash flow margin of 2.4% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $19.20 per share, MillerKnoll trades at 9.1x forward P/E. Read our free research report to see why you should think twice about including MLKN in your portfolio.
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