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.
The high-risk, high-reward nature of the Russell 2000 makes stock selection critical, and we’re here to guide you toward the right ones. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
C3.ai (AI)
Market Cap: $1.38 billion
Named after the three Cs of its original focus—carbon, cloud computing, and customer relationship management—C3.ai (NYSE: AI) provides enterprise AI software that helps organizations develop, deploy, and operate large-scale artificial intelligence applications across various industries.
Why Do We Avoid AI?
- Products, pricing, or go-to-market strategy need some adjustments as its billings have averaged 11.2% declines over the last year
- Gross margin of 43.5% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 12.6 percentage points over the next year
At $9.46 per share, C3.ai trades at 6.7x forward price-to-sales. If you’re considering AI for your portfolio, see our FREE research report to learn more.
Ameresco (AMRC)
Market Cap: $1.62 billion
Having played a role in upgrading the energy solutions of Alcatraz Island, Ameresco (NYSE: AMRC) provides energy and renewable energy solutions for various sectors.
Why Is AMRC Not Exciting?
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 12% annually
- Cash-burning history makes us doubt the long-term viability of its business model
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Ameresco’s stock price of $30.57 implies a valuation ratio of 25.2x forward P/E. Check out our free in-depth research report to learn more about why AMRC doesn’t pass our bar.
Enovis (ENOV)
Market Cap: $1.43 billion
With a focus on helping patients regain or maintain their natural motion, Enovis (NYSE: ENOV) develops and manufactures medical devices for orthopedic care, from injury prevention and pain management to joint replacement and rehabilitation.
Why Should You Sell ENOV?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.3% annually over the last five years
- Negative returns on capital show that some of its growth strategies have backfired, and its decreasing returns suggest its historical profit centers are aging
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Enovis is trading at $25.07 per share, or 7x forward P/E. To fully understand why you should be careful with ENOV, check out our full research report (it’s free).
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