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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
Lovesac (LOVE)
Market Cap: $284.1 million
Known for its oversized, premium beanbags, Lovesac (NASDAQ:LOVE) is a specialty furniture brand selling modular furniture.
Why Do We Think Twice About LOVE?
- Annual revenue growth of 1.7% over the last two years was below our standards for the consumer discretionary sector
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1% for the last two years
- Waning returns on capital imply its previous profit engines are losing steam
Lovesac is trading at $19.53 per share, or 5.7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why LOVE doesn’t pass our bar.
Mueller Water Products (MWA)
Market Cap: $3.88 billion
As one of the oldest companies in the water infrastructure industry, Mueller (NYSE:MWA) is a provider of water infrastructure products and flow control systems for various sectors.
Why Does MWA Worry Us?
- Muted 2.3% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Anticipated sales growth of 4.2% for the next year implies demand will be shaky
At $24.75 per share, Mueller Water Products trades at 19.5x forward P/E. Dive into our free research report to see why there are better opportunities than MWA.
AerSale (ASLE)
Market Cap: $297.6 million
Providing a one-stop shop that integrates multiple services and product offerings, AerSale (NASDAQ:ASLE) delivers full-service support to mid-life commercial aircraft.
Why Should You Sell ASLE?
- Annual sales declines of 6.2% for the past two years show its products and services struggled to connect with the market during this cycle
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
AerSale’s stock price of $6.35 implies a valuation ratio of 13.5x forward P/E. If you’re considering ASLE for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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