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.
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. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Genesco (GCO)
Market Cap: $243.5 million
Spanning a broad range of styles, brands, and prices, Genesco (NYSE: GCO) sells footwear, apparel, and accessories through multiple brands and banners.
Why Do We Avoid GCO?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- 8× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Genesco’s stock price of $22.56 implies a valuation ratio of 14.9x forward P/E. Dive into our free research report to see why there are better opportunities than GCO.
DNOW (DNOW)
Market Cap: $2.51 billion
Spun off from National Oilwell Varco, DNOW (NYSE: DNOW) provides distribution and supply chain solutions for the energy and industrial end markets.
Why Is DNOW Not Exciting?
- Sales trends were unexciting over the last two years as its 2.5% annual growth was below the typical industrials company
- Gross margin of 22.7% reflects its high production costs
- Flat earnings per share over the last two years lagged its peers
DNOW is trading at $13.56 per share, or 0.3x forward price-to-sales. To fully understand why you should be careful with DNOW, check out our full research report (it’s free for active Edge members).
ASGN (ASGN)
Market Cap: $2.09 billion
Evolving from its roots in IT staffing to become a high-end technology consulting powerhouse, ASGN (NYSE: ASGN) provides specialized IT consulting services and staffing solutions to Fortune 1000 companies and U.S. federal government agencies.
Why Is ASGN Risky?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 6.2% annually over the last two years
- Projected sales for the next 12 months are flat and suggest demand will be subdued
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
At $49.06 per share, ASGN trades at 10.2x forward P/E. Check out our free in-depth research report to learn more about why ASGN doesn’t pass our bar.
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