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. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
3D Systems (DDD)
Market Cap: $459 million
Founded by the inventor of stereolithography, 3D Systems (NYSE: DDD) engineers, manufactures, and sells 3D printers and other related products to the aerospace, automotive, healthcare, and consumer goods industries.
Why Do We Avoid DDD?
- Sales tumbled by 7.3% annually over the last five years, showing market trends are working against it during this cycle
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
3D Systems’s stock price of $2.84 implies a valuation ratio of 1.1x forward price-to-sales. If you’re considering DDD for your portfolio, see our FREE research report to learn more.
Addus HomeCare (ADUS)
Market Cap: $2.08 billion
Serving approximately 66,000 clients across 22 states with a focus on "dual eligible" Medicare and Medicaid beneficiaries, Addus HomeCare (NASDAQ: ADUS) provides in-home personal care, hospice, and home health services to elderly, chronically ill, and disabled individuals.
Why Are We Wary of ADUS?
- Modest revenue base of $1.45 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- ROIC hasn’t moved, making investors question whether its recent investments can increase profitability
At $113.76 per share, Addus HomeCare trades at 15.6x forward P/E. Dive into our free research report to see why there are better opportunities than ADUS.
Essent Group (ESNT)
Market Cap: $6.11 billion
Serving as a crucial bridge between homebuyers and the American dream of homeownership, Essent Group (NYSE: ESNT) provides private mortgage insurance and title services that enable lenders to offer home loans with down payments of less than 20%.
Why Are We Hesitant About ESNT?
- Sluggish 2.4% annualized growth in net premiums earned over the last two years indicates the firm trailed its insurance peers
- Efficiency has decreased over the last two years as its pre-tax profit margin fell by 8.3 percentage points
- Annual earnings per share growth of 3.1% underperformed its revenue over the last two years, showing its incremental sales were less profitable
Essent Group is trading at $66.28 per share, or 1x forward P/B. Read our free research report to see why you should think twice about including ESNT in your portfolio.
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