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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
PagerDuty (PD)
Market Cap: $1.07 billion
Born from the frustration of developers being woken up by unprioritized alerts, PagerDuty (NYSE:PD) is a digital operations management platform that helps organizations detect and respond to IT incidents, outages, and other critical issues in real-time.
Why Are We Cautious About PD?
- Offerings struggled to generate meaningful interest as its average billings growth of 3.8% over the last year did not impress
- Estimated sales growth of 2.8% for the next 12 months implies demand will slow from its two-year trend
- Historical operating margin losses point to an inefficient cost structure
PagerDuty is trading at $11.75 per share, or 2.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PD.
Rush Street Interactive (RSI)
Market Cap: $1.83 billion
Specializing in online casino gaming and sports betting, Rush Street Interactive (NYSE:RSI) is an operator of digital gaming platforms.
Why Should You Dump RSI?
- Number of monthly active users has disappointed over the past two years, indicating weak demand for its offerings
- Poor expense management has led to an operating margin of 4.1% that is below the industry average
- Poor free cash flow margin of 10.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $18.67 per share, Rush Street Interactive trades at 39x forward P/E. Read our free research report to see why you should think twice about including RSI in your portfolio.
Columbus McKinnon (CMCO)
Market Cap: $465.3 million
With 19 different brands across the globe, Columbus McKinnon (NASDAQ:CMCO) offers material handling equipment for the construction, manufacturing, and transportation industries.
Why Do We Pass on CMCO?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Performance over the past two years shows each sale was less profitable, as its earnings per share fell by 11.3% annually
- 3.8 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Columbus McKinnon’s stock price of $16.04 implies a valuation ratio of 6x forward P/E. To fully understand why you should be careful with CMCO, check out our full research report (it’s free for active Edge members).
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