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.
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.
DigitalOcean (DOCN)
Market Cap: $10.02 billion
Built for simplicity in a world of complex cloud solutions, DigitalOcean (NYSE: DOCN) provides a simplified cloud computing platform that enables developers and small businesses to quickly deploy and scale applications.
Why Are We Cautious About DOCN?
- Platform has low switching costs as its net revenue retention rate of 99.8% demonstrates high turnover
- Bad unit economics and steep infrastructure costs are reflected in its gross margin of 59.9%, one of the worst among software companies
- Operating margin improvement of 5.8 percentage points over the last year demonstrates its ability to scale efficiently
DigitalOcean is trading at $96.86 per share, or 9.9x forward price-to-sales. Check out our free in-depth research report to learn more about why DOCN doesn’t pass our bar.
Griffon (GFF)
Market Cap: $4.25 billion
Initially in the defense industry, Griffon (NYSE: GFF) is a now diversified company specializing in home improvement, professional equipment, and building products.
Why Do We Think Twice About GFF?
- Annual sales declines of 2.7% for the past two years show its products and services struggled to connect with the market during this cycle
- Sales are projected to tank by 28.7% over the next 12 months as its demand continues evaporating
Griffon’s stock price of $91.18 implies a valuation ratio of 16.9x forward P/E. Dive into our free research report to see why there are better opportunities than GFF.
Worthington (WOR)
Market Cap: $2.67 billion
Founded by a steel salesman, Worthington (NYSE: WOR) specializes in steel processing, pressure cylinders, and engineered cabs for commercial markets.
Why Is WOR Risky?
- Annual sales declines of 13.9% for the past five years show its products and services struggled to connect with the market during this cycle
- Earnings per share have dipped by 26.7% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $54 per share, Worthington trades at 14.4x forward P/E. To fully understand why you should be careful with WOR, check out our full research report (it’s free).
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