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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
ThredUp (TDUP)
Market Cap: $403.2 million
Founded to revolutionize thrifting, ThredUp (NASDAQ:TDUP) is a leading online fashion resale marketplace offering a wide selection of gently-used clothing and accessories.
Why Are We Out on TDUP?
- Performance surrounding its orders has lagged its peers
- Suboptimal cost structure is highlighted by its history of operating margin losses
- Forecasted free cash flow margin suggests the company will fail to improve its cash conversion over the next year
ThredUp is trading at $3.08 per share, or 23.9x forward EV-to-EBITDA. To fully understand why you should be careful with TDUP, check out our full research report (it’s free).
Grocery Outlet (GO)
Market Cap: $1.10 billion
Due to its differentiated procurement and buying approach, Grocery Outlet (NASDAQ:GO) is a discount grocery store chain that offers substantial discounts on name-brand products.
Why Is GO Risky?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 8.8 percentage points
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Grocery Outlet’s stock price of $10.95 implies a valuation ratio of 18.3x forward P/E. Read our free research report to see why you should think twice about including GO in your portfolio.
GEO Group (GEO)
Market Cap: $4.03 billion
With a global footprint spanning three continents and approximately 81,000 beds across 100 facilities, GEO Group (NYSE:GEO) operates secure facilities, processing centers, and reentry services for government agencies in the United States, Australia, and South Africa.
Why Are We Wary of GEO?
- 4.2% annual revenue growth over the last five years was slower than its business services peers
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 3.7 percentage points
- Free cash flow margin shrank by 7.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $31.16 per share, GEO Group trades at 20.9x forward P/E. Dive into our free research report to see why there are better opportunities than GEO.
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