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.
The Cheesecake Factory (CAKE)
Market Cap: $5.40 billion
Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ:CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.
Why Are We Wary of CAKE?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Subpar operating margin of 5.3% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
The Cheesecake Factory is trading at $109.15 per share, or 23.4x forward P/E. Dive into our free research report to see why there are better opportunities than CAKE.
Caleres (CAL)
Market Cap: $410.8 million
The owner of Dr. Scholl's, Caleres (NYSE:CAL) is a footwear company offering a range of styles.
Why Should You Sell CAL?
- Muted 3.6% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $12.24 per share, Caleres trades at 6.6x forward P/E. If you’re considering CAL for your portfolio, see our FREE research report to learn more.
Figs (FIGS)
Market Cap: $2.49 billion
Rising to fame via TikTok and founded in 2013 by Heather Hasson and Trina Spear, Figs (NYSE:FIGS) is a healthcare apparel company known for its stylish approach to medical attire and uniforms.
Why Do We Pass on FIGS?
- Performance surrounding its active customers has lagged its peers
- Poor free cash flow margin of 10.7% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Figs’s stock price of $15.00 implies a valuation ratio of 43x forward P/E. To fully understand why you should be careful with FIGS, check out our full research report (it’s free).
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