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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Olaplex (OLPX)
Market Cap: $953.9 million
Rising to fame on TikTok because of its “bond building" hair products, Olaplex (NASDAQ: OLPX) offers products and treatments that repair the damage caused by traditional heat and chemical-based styling goods.
Why Does OLPX Give Us Pause?
- Annual revenue declines of 16.4% over the last three years indicate problems with its market positioning
- Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable
- Free cash flow margin dropped by 13.2 percentage points over the last year, implying the company became more capital intensive as competition picked up
Olaplex’s stock price of $1.44 implies a valuation ratio of 18.4x forward P/E. Check out our free in-depth research report to learn more about why OLPX doesn’t pass our bar.
EnerSys (ENS)
Market Cap: $3.79 billion
Supplying batteries that power equipment as big as mining rigs, EnerSys (NYSE: ENS) manufactures various kinds of batteries for a range of industries.
Why Does ENS Fall Short?
- Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.6%
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 4.2% for the last five years
At $101.03 per share, EnerSys trades at 8.7x forward EV-to-EBITDA. To fully understand why you should be careful with ENS, check out our full research report (it’s free).
Genco (GNK)
Market Cap: $739.3 million
Headquartered in NYC, Genco (NYSE: GNK) is a shipping company that transports dry bulk cargo along worldwide maritime routes.
Why Is GNK Not Exciting?
- Performance surrounding its owned vessels has lagged its peers
- Earnings per share have contracted by 61.9% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 26.4 percentage points
Genco is trading at $17.21 per share, or 18.1x forward P/E. If you’re considering GNK for your portfolio, see our FREE research report to learn more.
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