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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Shoals (SHLS)
Market Cap: $1.20 billion
Started in Huntsville, Alabama, Shoals (NASDAQ:SHLS) designs and manufactures products that make solar energy systems work more efficiently.
Why Are We Hesitant About SHLS?
- Earnings per share fell by 8.5% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 8.3 percentage points
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Shoals is trading at $7.07 per share, or 13.5x forward P/E. If you’re considering SHLS for your portfolio, see our FREE research report to learn more.
Neogen (NEOG)
Market Cap: $2.57 billion
Founded in 1981 and operating at the intersection of food safety and animal health, Neogen (NASDAQ:NEOG) develops and manufactures diagnostic tests and related products to detect dangerous substances in food and pharmaceuticals for animal health.
Why Is NEOG Risky?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 3% annually over the last two years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $11.93 per share, Neogen trades at 38.5x forward P/E. To fully understand why you should be careful with NEOG, check out our full research report (it’s free).
Dentsply Sirona (XRAY)
Market Cap: $2.09 billion
With roots dating back to 1877 when it introduced the first dental electric drill, Dentsply Sirona (NASDAQ:XRAY) manufactures and sells professional dental equipment, technologies, and consumable products used by dentists and specialists worldwide.
Why Should You Sell XRAY?
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 13.6% annually, worse than its revenue
- 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
Dentsply Sirona’s stock price of $10.50 implies a valuation ratio of 7.2x forward P/E. Dive into our free research report to see why there are better opportunities than XRAY.
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