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. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
Opendoor (OPEN)
Market Cap: $495.6 million
Founded by real estate guru Eric Wu, Opendoor (NASDAQ:OPEN) offers a technology-driven, convenient, and streamlined process to buy and sell homes.
Why Do We Avoid OPEN?
- Demand for its offerings was relatively low as its number of homes purchased has underwhelmed
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $0.69 per share, Opendoor trades at 0.1x forward price-to-sales. Read our free research report to see why you should think twice about including OPEN in your portfolio.
Shake Shack (SHAK)
Market Cap: $4.72 billion
Started as a hot dog cart in New York City's Madison Square Park, Shake Shack (NYSE:SHAK) is a fast-food restaurant known for its burgers and milkshakes.
Why Are We Wary of SHAK?
- Operating margin of 0.6% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.6% for the last two years
- Negative returns on capital show that some of its growth strategies have backfired
Shake Shack is trading at $117.28 per share, or 88.3x forward P/E. Check out our free in-depth research report to learn more about why SHAK doesn’t pass our bar.
DistributionNOW (DNOW)
Market Cap: $1.54 billion
Spun off from National Oilwell Varco, DistributionNOW (NYSE:DNOW) provides distribution and supply chain solutions for the energy and industrial end markets.
Why Do We Steer Clear of DNOW?
- Annual sales declines of 2.8% for the past five years show its products and services struggled to connect with the market during this cycle
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Free cash flow margin shrank by 4.8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
DistributionNOW’s stock price of $14.59 implies a valuation ratio of 10.1x forward EV-to-EBITDA. If you’re considering DNOW for your portfolio, see our FREE research report to learn more.
High-Quality Stocks for All Market Conditions
Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.
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