3 Russell 2000 Stocks Walking a Fine Line

The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.

Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.

Redwire (RDW)

Market Cap: $1.33 billion

Based in Jacksonville, Florida, Redwire (NYSE:RDW) is a provider of systems and components used in space infrastructure.

Why Do We Pass on RDW?

1. Historically negative EPS raises concerns for risk-averse investors and makes its earnings potential harder to gauge
2. Free cash flow margin shrank by 27.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Redwire is trading at $9.26 per share, or 10.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including RDW in your portfolio.

Integral Ad Science (IAS)

Market Cap: $1.52 billion

Processing over 280 billion digital ad interactions daily through its AI-powered technology, Integral Ad Science (NASDAQ:IAS) provides a cloud-based platform that measures and verifies digital advertising across devices, channels, and formats to ensure ads are viewable, fraud-free, and brand-safe.

Why Are We Wary of IAS?

1. Revenue increased by 15.4% annually over the last three years, acceptable on an absolute basis but tepid for a software company enjoying secular tailwinds
2. Free cash flow margin is forecasted to shrink by 6.7 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors

At $9.19 per share, Integral Ad Science trades at 2.4x forward price-to-sales. Check out our free in-depth research report to learn more about why IAS doesn’t pass our bar.

Vimeo (VMEO)

Market Cap: $702.6 million

Originally launched in 2004 as a platform for filmmakers seeking a high-quality alternative to YouTube, Vimeo (NASDAQ:VMEO) provides cloud-based video creation, editing, hosting, and distribution software that helps businesses and creators make, manage, and share professional-quality videos.

Why Does VMEO Worry Us?

1. Sales stagnated over the last two years and signal the need for new growth strategies
2. Smaller revenue base of $415.4 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
3. Push for growth has led to negative returns on capital, signaling value destruction

Vimeo’s stock price of $4.25 implies a valuation ratio of 22.8x forward EV-to-EBITDA. To fully understand why you should be careful with VMEO, check out our full research report (it’s free).

Stocks We Like More

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