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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Energizer (ENR)
Market Cap: $1.33 billion
Masterminds behind the viral Energizer Bunny mascot, Energizer (NYSE:ENR) is one of the world's largest manufacturers of batteries.
Why Do We Think Twice About ENR?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.9%
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Energizer’s stock price of $19.50 implies a valuation ratio of 5.4x forward P/E. To fully understand why you should be careful with ENR, check out our full research report (it’s free).
Taylor Morrison Home (TMHC)
Market Cap: $6.68 billion
Named “America’s Most Trusted Home Builder” in 2019, Taylor Morrison Home (NYSE:TMHC) builds single family homes and communities across the United States.
Why Should You Sell TMHC?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 33.2% declines over the past two years
- Projected sales decline of 12.9% for the next 12 months points to a tough demand environment ahead
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
At $71.65 per share, Taylor Morrison Home trades at 13.1x forward P/E. If you’re considering TMHC for your portfolio, see our FREE research report to learn more.
Omnicell (OMCL)
Market Cap: $1.96 billion
Driven by the vision of an "Autonomous Pharmacy" with zero medication errors, Omnicell (NASDAQ:OMCL) provides medication management automation and adherence tools that help healthcare systems and pharmacies reduce errors and improve efficiency.
Why Are We Out on OMCL?
- Annual revenue growth of 5.4% over the last two years was below our standards for the healthcare sector
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 6.8% annually
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its shrinking returns suggest its past profit sources are losing steam
Omnicell is trading at $43 per share, or 23.4x forward P/E. Read our free research report to see why you should think twice about including OMCL in your portfolio.
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