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. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Genesco (GCO)
Market Cap: $307.8 million
Spanning a broad range of styles, brands, and prices, Genesco (NYSE: GCO) sells footwear, apparel, and accessories through multiple brands and banners.
Why Do We Pass on GCO?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Genesco’s stock price of $28.56 implies a valuation ratio of 18.1x forward P/E. Dive into our free research report to see why there are better opportunities than GCO.
Rush Street Interactive (RSI)
Market Cap: $2.00 billion
Specializing in online casino gaming and sports betting, Rush Street Interactive (NYSE: RSI) is an operator of digital gaming platforms.
Why Are We Hesitant About RSI?
- Poor expense management has led to an operating margin of 2.6% that is below the industry average
At $21 per share, Rush Street Interactive trades at 55.7x forward P/E. Check out our free in-depth research report to learn more about why RSI doesn’t pass our bar.
Kimball Electronics (KE)
Market Cap: $690.9 million
Founded in 1961, Kimball Electronics (NYSE: KE) is a global contract manufacturer specializing in electronics and manufacturing solutions for automotive, medical, and industrial markets.
Why Is KE Risky?
- Annual sales declines of 9.7% for the past two years show its products and services struggled to connect with the market during this cycle
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 8.1%
- Earnings per share have contracted by 29.1% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
Kimball Electronics is trading at $28.34 per share, or 28.2x forward P/E. To fully understand why you should be careful with KE, check out our full research report (it’s free).
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