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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Mayville Engineering (MEC)
Market Cap: $437.6 million
Originally founded solely on tool and die manufacturing, Mayville Engineering Company (NYSE: MEC) specializes in metal fabrication, tube bending, and welding to be used in various industries.
Why Do We Steer Clear of MEC?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.7% annually over the last two years
- High input costs result in an inferior gross margin of 12.2% that must be offset through higher volumes
- Issuance of new shares over the last five years caused its earnings per share to fall by 17% annually while its revenue grew
Mayville Engineering is trading at $17.18 per share, or 25.3x forward P/E. Dive into our free research report to see why there are better opportunities than MEC.
Greenbrier (GBX)
Market Cap: $1.32 billion
Having designed the industry’s first double-decker railcar in the 1980s, Greenbrier (NYSE: GBX) supplies the freight rail transportation industry with railcars and related services.
Why Do We Think GBX Will Underperform?
- Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
- Negative free cash flow raises questions about the return timeline for its investments
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Greenbrier’s stock price of $42.55 implies a valuation ratio of 12.4x forward P/E. To fully understand why you should be careful with GBX, check out our full research report (it’s free).
LGI Homes (LGIH)
Market Cap: $1.16 billion
Based in Texas, LGI Homes (NASDAQ: LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.
Why Are We Bearish on LGIH?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 10.4% annually over the last five years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $49.46 per share, LGI Homes trades at 16.2x forward P/E. If you’re considering LGIH for your portfolio, see our FREE research report to learn more.
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