3 Russell 2000 Stocks We Steer Clear Of

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.

Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.

Cars.com (CARS)

Market Cap: $773.4 million

Originally started as a joint venture between several media companies including The Washington Post and The New York Times, Cars.com (NYSE:CARS) is a digital marketplace that connects new and used car buyers and sellers.

Why Does CARS Worry Us?

1. Increasing competition is redirecting attention to other platforms as it failed to grow its dealer customers over the last two years
2. Estimated sales growth of 2.6% for the next 12 months is soft and implies weaker demand
3. Earnings per share have dipped by 2% annually over the past three years, which is concerning because stock prices follow EPS over the long term

At $12.93 per share, Cars.com trades at 3.6x forward EV/EBITDA. Check out our free in-depth research report to learn more about why CARS doesn’t pass our bar.

Energizer (ENR)

Market Cap: $1.43 billion

Masterminds behind the viral Energizer Bunny mascot, Energizer (NYSE:ENR) is one of the world's largest manufacturers of batteries.

Why Do We Avoid ENR?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Free cash flow margin dropped by 9.3 percentage points over the last year, implying the company became more capital intensive as competition picked up
3. 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Energizer is trading at $21.09 per share, or 5.7x forward P/E. Dive into our free research report to see why there are better opportunities than ENR.

Plug Power (PLUG)

Market Cap: $3.24 billion

Powering forklifts for Walmart’s distribution centers, Plug Power (NASDAQ:PLUG) provides hydrogen fuel cells used to power electric motors.

Why Does PLUG Give Us Pause?

1. Sales tumbled by 12.8% annually over the last two years, showing market trends are working against its favor during this cycle
2. Cash-burning history makes us doubt the long-term viability of its business model
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Plug Power’s stock price of $2.35 implies a valuation ratio of 3.2x forward price-to-sales. To fully understand why you should be careful with PLUG, check out our full research report (it’s free for active Edge members).

High-Quality Stocks for All Market Conditions

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