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. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
National Vision (EYE)
Market Cap: $2.09 billion
Operating under multiple brands, National Vision (NYSE: EYE) sells optical products such as eyeglasses and provides optical services such as eye exams.
Why Are We Out on EYE?
- Products have few die-hard fans as sales have declined by 1.6% annually over the last three years
- Store closures are a headwind for growth and suggest it’s rightsizing operations to optimize sales at existing locations
- Underwhelming 3.1% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
At $26.35 per share, National Vision trades at 29.3x forward P/E. Check out our free in-depth research report to learn more about why EYE doesn’t pass our bar.
Hilton Grand Vacations (HGV)
Market Cap: $4.12 billion
Spun off from Hilton Worldwide in 2017, Hilton Grand Vacations (NYSE: HGV) is a global timeshare company that provides travel experiences for its customers through its timeshare resorts and club membership programs.
Why Do We Pass on HGV?
- Number of conducted tours has disappointed over the past two years, indicating weak demand for its offerings
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- High net-debt-to-EBITDA ratio of 11× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Hilton Grand Vacations’s stock price of $48.17 implies a valuation ratio of 11.3x forward P/E. Read our free research report to see why you should think twice about including HGV in your portfolio.
Novanta (NOVT)
Market Cap: $4.68 billion
Originally a pioneer in the laser scanning industry during the late 1960s, Novanta (NASDAQ: NOVT) offers medicine and manufacturing technology to the medical, life sciences, and manufacturing industries.
Why Is NOVT Not Exciting?
- Sales trends were unexciting over the last two years as its 4% annual growth was below the typical industrials company
- Earnings per share were flat over the last two years and fell short of the peer group average
- Free cash flow margin dropped by 3.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Novanta is trading at $131.02 per share, or 36.3x forward P/E. To fully understand why you should be careful with NOVT, check out our full research report (it’s free).
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