Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
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 steer clear of and some alternatives to watch instead.
Kontoor Brands (KTB)
Market Cap: $3.93 billion
Founded in 2019 after separating from VF Corporation, Kontoor Brands (NYSE: KTB) is a clothing company known for its high-quality denim products.
Why Do We Avoid KTB?
- Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 3.2 percentage points over the next year
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Kontoor Brands’s stock price of $71.20 implies a valuation ratio of 10.8x forward P/E. If you’re considering KTB for your portfolio, see our FREE research report to learn more.
GATX (GATX)
Market Cap: $6.02 billion
Originally founded to ship beer, GATX (NYSE: GATX) provides leasing and management services for railcars and other transportation assets globally.
Why Does GATX Give Us Pause?
- Sluggish trends in its active railcars suggest customers aren’t adopting its solutions as quickly as the company hoped
- Negative free cash flow raises questions about the return timeline for its investments
- High net-debt-to-EBITDA ratio of 8× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $169.36 per share, GATX trades at 17x forward P/E. Check out our free in-depth research report to learn more about why GATX doesn’t pass our bar.
Lantheus (LNTH)
Market Cap: $4.82 billion
Pioneering the "Find, Fight and Follow" approach to disease management, Lantheus Holdings (NASDAQGM:LNTH) develops and commercializes radiopharmaceuticals and other imaging agents that help healthcare professionals detect, diagnose, and treat diseases.
Why Are We Hesitant About LNTH?
- Modest revenue base of $1.54 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Projected sales decline of 6.3% for the next 12 months points to a tough demand environment ahead
- Costs have risen faster than its revenue over the last two years, causing its adjusted operating margin to decline by 10.1 percentage points
Lantheus is trading at $73.70 per share, or 14.5x forward P/E. Read our free research report to see why you should think twice about including LNTH in your portfolio.
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