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.
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 steer clear of and some alternatives to watch instead.
TreeHouse Foods (THS)
Market Cap: $919.1 million
Whether it be packaged crackers, broths, or beverages, Treehouse Foods (NYSE: THS) produces a wide range of private-label foods for grocery and food service customers.
Why Should You Sell THS?
- Declining unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
- Gross margin of 16.5% is an output of its commoditized products
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $18.25 per share, TreeHouse Foods trades at 9.7x forward P/E. Dive into our free research report to see why there are better opportunities than THS.
Edgewell Personal Care (EPC)
Market Cap: $900.9 million
Boasting brands such as Banana Boat, Schick, and Skintimate, Edgewell Personal Care (NYSE: EPC) sells personal care products in the skin and sun care, shave, and feminine care categories.
Why Are We Out on EPC?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Performance over the past three years shows each sale was less profitable, as its earnings per share fell by 2.6% annually
- Free cash flow margin shrank by 4.9 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
Edgewell Personal Care’s stock price of $19.39 implies a valuation ratio of 6.6x forward P/E. Read our free research report to see why you should think twice about including EPC in your portfolio.
PAR Technology (PAR)
Market Cap: $1.43 billion
Originally founded in 1968 as a defense contractor for the U.S. government, PAR Technology (NYSE: PAR) provides cloud-based software, payment processing, and hardware solutions that help restaurants manage everything from point-of-sale to customer loyalty programs.
Why Is PAR Not Exciting?
- Negative free cash flow raises questions about the return timeline for its investments
- Negative returns on capital show that some of its growth strategies have backfired
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
PAR Technology is trading at $34.93 per share, or 159.8x forward P/E. Check out our free in-depth research report to learn more about why PAR doesn’t pass our bar.
Stocks We Like More
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