Small-cap stocks in the Russell 2000 can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
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 avoid and better alternatives to consider.
Udemy (UDMY)
Market Cap: $1.16 billion
With courses ranging from investing to cooking to computer programming, Udemy (NASDAQ: UDMY) is an online learning platform that connects learners with expert instructors who specialize in a wide range of topics.
Why Does UDMY Fall Short?
- Focus on expanding its platform came at the expense of monetization as its average revenue per buyer fell by 1.8% annually
- Estimated sales growth of 1% for the next 12 months implies demand will slow from its three-year trend
- Expensive marketing campaigns hurt its profitability and make us wonder what would happen if it let up on the gas
Udemy’s stock price of $7.85 implies a valuation ratio of 15.8x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than UDMY.
Central Garden & Pet (CENT)
Market Cap: $2.17 billion
Enhancing the lives of both pets and homeowners, Central Garden & Pet (NASDAQ: CENT) is a leading producer and distributor of essential products for pet care, lawn and garden maintenance, and pest control.
Why Do We Think CENT Will Underperform?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Sales are projected to be flat over the next 12 months and imply weak demand
- Earnings per share lagged its peers over the last three years as they only grew by 1.5% annually
At $35.92 per share, Central Garden & Pet trades at 16.2x forward price-to-earnings. Read our free research report to see why you should think twice about including CENT in your portfolio.
ANI Pharmaceuticals (ANIP)
Market Cap: $1.38 billion
With a diverse portfolio of 116 pharmaceutical products and a growing rare disease platform, ANI Pharmaceuticals (NASDAQ: ANIP) develops, manufactures, and markets branded and generic prescription pharmaceuticals, with a focus on rare disease treatments.
Why Does ANIP Worry Us?
- Revenue base of $614.4 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Earnings per share were flat while its revenue grew over the last five years, partly because it issued new shares
- Negative returns on capital show management lost money while trying to expand the business
ANI Pharmaceuticals is trading at $68 per share, or 12.9x forward price-to-earnings. To fully understand why you should be careful with ANIP, check out our full research report (it’s free).
Stocks We Like More
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Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Axon (+711% five-year return). Find your next big winner with StockStory today for free.
