3 Russell 2000 Stocks We Approach with Caution

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.

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

Brookdale (BKD)

Market Cap: $3.44 billion

With a network of over 650 communities serving approximately 59,000 residents across 41 states, Brookdale Senior Living (NYSE:BKD) operates senior living communities across the United States, offering independent living, assisted living, memory care, and continuing care retirement communities.

Why Are We Cautious About BKD?

1. Sales tumbled by 2% annually over the last five years, showing market trends are working against its favor during this cycle
2. Projected sales decline of 5.2% for the next 12 months points to a tough demand environment ahead
3. High net-debt-to-EBITDA ratio of 11× could force the company to raise capital at unfavorable terms if market conditions deteriorate

Brookdale is trading at $14.45 per share, or 17.2x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why BKD doesn’t pass our bar.

10x Genomics (TXG)

Market Cap: $2.67 billion

Founded in 2012 by scientists seeking to overcome limitations in traditional biological research methods, 10x Genomics (NASDAQ:TXG) develops instruments, consumables, and software that enable researchers to analyze biological systems at single-cell resolution and spatial context.

Why Do We Steer Clear of TXG?

1. Annual revenue growth of 1.9% over the last two years was below our standards for the healthcare sector
2. Smaller revenue base of $642.8 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

10x Genomics’s stock price of $20.58 implies a valuation ratio of 4.3x forward price-to-sales. To fully understand why you should be careful with TXG, check out our full research report (it’s free).

Perella Weinberg (PWP)

Market Cap: $1.17 billion

Founded in 2006 by veteran investment bankers Joseph Perella and Peter Weinberg during a wave of boutique advisory firm launches, Perella Weinberg Partners (NASDAQ:PWP) is a global independent advisory firm that provides strategic and financial advice to corporations, financial sponsors, and government institutions.

Why Do We Pass on PWP?

1. Falling earnings per share over the last four years has some investors worried as stock prices ultimately follow EPS over the long term
2. Negative return on equity shows management lost money while trying to expand the business

At $16.67 per share, Perella Weinberg trades at 13.3x forward P/E. If you’re considering PWP for your portfolio, see our FREE research report to learn more.

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