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.
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 to steer clear of and some alternatives to watch instead.
Rapid7 (RPD)
Market Cap: $440.8 million
With its name inspired by the need for quick responses to cyber threats, Rapid7 (NASDAQ: RPD) provides cybersecurity software and services that help organizations detect vulnerabilities, monitor threats, and respond to security incidents.
Why Should You Dump RPD?
- Average billings growth of 1.3% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 2.8 percentage points
Rapid7 is trading at $6.80 per share, or 0.5x forward price-to-sales. Check out our free in-depth research report to learn more about why RPD doesn’t pass our bar.
Monro (MNRO)
Market Cap: $593.2 million
Started as a single location in Rochester, New York, Monro (NASDAQ: MNRO) provides common auto services such as brake repairs, tire replacements, and oil changes.
Why Do We Think MNRO Will Underperform?
- Ongoing store closures and lackluster same-store sales indicate sluggish demand and a focus on consolidation
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Sales were less profitable over the last three years as its earnings per share fell by 30.4% annually, worse than its revenue declines
Monro’s stock price of $19.67 implies a valuation ratio of 33.8x forward P/E. If you’re considering MNRO for your portfolio, see our FREE research report to learn more.
MarineMax (HZO)
Market Cap: $655.1 million
Appropriately headquartered in Clearwater, Florida, MarineMax (NYSE: HZO) sells boats, yachts, and other marine products.
Why Do We Steer Clear of HZO?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Earnings per share have dipped by 62.2% annually over the past three years, which is concerning because stock prices follow EPS over the long term
- High net-debt-to-EBITDA ratio of 11× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $29.44 per share, MarineMax trades at 29.4x forward P/E. To fully understand why you should be careful with HZO, check out our full research report (it’s free).
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