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. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
J&J Snack Foods (JJSF)
Market Cap: $2.23 billion
Best known for its SuperPretzel soft pretzels and ICEE frozen drinks, J&J Snack Foods (NASDAQ:JJSF) produces a range of snacks and beverages and distributes them primarily to supermarket and food service customers.
Why Is JJSF Not Exciting?
- Smaller revenue base of $1.59 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Estimated sales growth of 2.8% for the next 12 months implies demand will slow from its three-year trend
- Underwhelming 6.6% return on capital reflects management’s difficulties in finding profitable growth opportunities
J&J Snack Foods is trading at $120.27 per share, or 22.5x forward P/E. Dive into our free research report to see why there are better opportunities than JJSF.
NeoGenomics (NEO)
Market Cap: $1.02 billion
Operating a network of CAP-accredited and CLIA-certified laboratories across the United States and United Kingdom, NeoGenomics (NASDAQ:NEO) provides specialized cancer diagnostic testing services, including genetic analysis, molecular testing, and pathology consultation for oncologists and healthcare providers.
Why Is NEO Risky?
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 11.9% annually
- Negative returns on capital show management lost money while trying to expand the business, and its decreasing returns suggest its historical profit centers are aging
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
NeoGenomics’s stock price of $7.96 implies a valuation ratio of 35.6x forward P/E. Read our free research report to see why you should think twice about including NEO in your portfolio.
IMAX (IMAX)
Market Cap: $1.42 billion
Originally developed for World Expo '67 in Montreal as an innovative projection system, IMAX (NYSE:IMAX) provides proprietary large-format cinema technology and systems that deliver immersive movie experiences with enhanced image quality and sound.
Why Does IMAX Give Us Pause?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Push for growth has led to negative returns on capital, signaling value destruction
At $26.37 per share, IMAX trades at 21.1x forward P/E. If you’re considering IMAX for your portfolio, see our FREE research report to learn more.
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