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 steer clear of and some alternatives to watch instead.
Torrid (CURV)
Market Cap: $133.3 million
Promoting a message of body positivity and inclusiveness, Torrid Holdings (NYSE: CURV) is a plus-size women’s apparel and accessories retailer.
Why Should You Dump CURV?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Free cash flow margin dropped by 7.9 percentage points over the last year, implying the company became more capital intensive as competition picked up
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Torrid’s stock price of $1.35 implies a valuation ratio of 7.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including CURV in your portfolio.
Universal Technical Institute (UTI)
Market Cap: $2.15 billion
Founded in 1965, Universal Technical Institute (NYSE: UTI) is a leading provider of technical training programs, specializing in automotive, diesel, collision repair, motorcycle, and marine technicians.
Why Do We Avoid UTI?
- Performance surrounding its new students has lagged its peers
- Free cash flow margin is expected to increase by 1 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $39.12 per share, Universal Technical Institute trades at 19x forward EV-to-EBITDA. If you’re considering UTI for your portfolio, see our FREE research report to learn more.
Mayville Engineering (MEC)
Market Cap: $510.7 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 Does MEC Worry Us?
- Sales tumbled by 4.3% annually over the last two years, showing market trends are working against its favor during this cycle
- Earnings per share have contracted by 42.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Mayville Engineering is trading at $24.95 per share, or 51.6x forward P/E. To fully understand why you should be careful with MEC, check out our full research report (it’s free).
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