3 Russell 2000 Stocks with Warning Signs

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.

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 that don’t make the cut and some better choices instead.

Udemy (UDMY)

Market Cap: $1.07 billion

With courses ranging from investing to cooking to computer programming, Udemy (NASDAQ:UDMY) is an online learning platform that connects learners with expert instructors who specialize in a wide range of topics.

Why Are We Hesitant About UDMY?

1. Preference for prioritizing user growth over monetization has led to 1.3% annual drops in its average revenue per buyer
2. Sales are projected to remain flat over the next 12 months as demand decelerates from its three-year trend
3. Highly competitive market means it’s on the never-ending treadmill of sales and marketing spend

Udemy is trading at $7.18 per share, or 11.4x forward EV/EBITDA. To fully understand why you should be careful with UDMY, check out our full research report (it’s free).

Monro (MNRO)

Market Cap: $464.7 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 Pass on MNRO?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 6 percentage points
3. Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging

At $15.59 per share, Monro trades at 22x forward P/E. If you’re considering MNRO for your portfolio, see our FREE research report to learn more.

agilon health (AGL)

Market Cap: $362.6 million

Transforming how doctors care for seniors by shifting financial incentives from volume to outcomes, agilon health (NYSE:AGL) provides a platform that helps primary care physicians transition to value-based care models for Medicare patients through long-term partnerships and global capitation arrangements.

Why Are We Wary of AGL?

1. Costs have risen faster than its revenue over the last two years, causing its adjusted operating margin to decline by 3.9 percentage points
2. Cash-burning history makes us doubt the long-term viability of its business model
3. Negative returns on capital show that some of its growth strategies have backfired

agilon health’s stock price of $0.86 implies a valuation ratio of 0.1x forward price-to-sales. Check out our free in-depth research report to learn more about why AGL doesn’t pass our bar.

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