3 Russell 2000 Stocks We Find Risky

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.

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. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.

Advance Auto Parts (AAP)

Market Cap: $3.06 billion

Founded in Virginia in 1932, Advance Auto Parts (NYSE:AAP) is an auto parts and accessories retailer that sells everything from carburetors to motor oil to car floor mats.

Why Do We Steer Clear of AAP?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
2. Free cash flow margin dropped by 6.7 percentage points over the last year, implying the company became more capital intensive as competition picked up
3. 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Advance Auto Parts is trading at $50.50 per share, or 19.9x forward P/E. Dive into our free research report to see why there are better opportunities than AAP.

Movado (MOV)

Market Cap: $399.1 million

With its watches displayed in 20 museums around the world, Movado (NYSE:MOV) is a watchmaking company with a portfolio of watch brands and accessories.

Why Do We Avoid MOV?

1. Products and services aren't resonating with the market as its revenue declined by 4.3% annually over the last two years
2. Projected sales growth of 1.2% for the next 12 months suggests sluggish demand
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Movado’s stock price of $18.03 implies a valuation ratio of 0.6x forward price-to-sales. If you’re considering MOV for your portfolio, see our FREE research report to learn more.

Universal Technical Institute (UTI)

Market Cap: $1.62 billion

Founded in 1965, Universal Technical Institute (NYSE: UTI) is a leading provider of technical training programs, specializing in automotive, diesel, collision repair, motorcycle, and marine technicians.

Why Should You Dump UTI?

1. Projected 2.6 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
2. ROIC of 11.5% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

At $29.79 per share, Universal Technical Institute trades at 14.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including UTI in your portfolio.

Stocks We Like More

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