3 Russell 2000 Stocks We Think Twice About

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

BlackLine (BL)

Market Cap: $3.54 billion

Born from the vision to eliminate tedious manual spreadsheet work for accountants, BlackLine (NASDAQ:BL) provides cloud-based software that automates and streamlines financial close, intercompany accounting, and invoice-to-cash processes for accounting departments.

Why Does BL Worry Us?

1. Products, pricing, or go-to-market strategy may need some adjustments as its 7.2% average billings growth over the last year was weak
2. Estimated sales growth of 8.3% for the next 12 months implies demand will slow from its two-year trend
3. Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage

At $57.25 per share, BlackLine trades at 5x forward price-to-sales. Dive into our free research report to see why there are better opportunities than BL.

Petco (WOOF)

Market Cap: $891.2 million

Historically known for its window displays of pets for sale or adoption, Petco (NASDAQ:WOOF) is a specialty retailer of pet food and supplies as well as a provider of services such as wellness checks and grooming.

Why Do We Avoid WOOF?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
2. Falling earnings per share over the last four years has some investors worried as stock prices ultimately follow EPS over the long term
3. High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens

Petco’s stock price of $3.21 implies a valuation ratio of 18.5x forward P/E. Read our free research report to see why you should think twice about including WOOF in your portfolio.

Hillenbrand (HI)

Market Cap: $2.23 billion

Hillenbrand, Inc. (NYSE: HI) is an industrial company that designs, manufactures, and sells highly engineered processing equipment and solutions for various industries.

Why Do We Think HI Will Underperform?

1. Annual revenue growth of 3.5% over the last two years was below our standards for the industrials sector
2. Free cash flow margin shrank by 18.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Waning returns on capital imply its previous profit engines are losing steam

Hillenbrand is trading at $31.60 per share, or 13x forward P/E. Dive into our free research report to see why there are better opportunities than HI.

Stocks We Like More

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