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 avoid and better alternatives to consider.
Vital Farms (VITL)
Market Cap: $421.2 million
With an emphasis on ethically produced products, Vital Farms (NASDAQ:VITL) specializes in pasture-raised eggs and butter.
Why Are We Cautious About VITL?
- Modest revenue base of $784.4 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Sales are projected to remain flat over the next 12 months as demand decelerates from its three-year trend
- Free cash flow margin dropped by 14 percentage points over the last year, implying the company became more capital intensive as competition picked up
Vital Farms is trading at $9.83 per share, or 0.6x forward price-to-sales. To fully understand why you should be careful with VITL, check out our full research report (it’s free).
Everforth (EFOR)
Market Cap: $844.6 million
Evolving from its roots in IT staffing to become a high-end technology consulting powerhouse, Everforth (EFOR) provides specialized IT consulting services and staffing solutions to Fortune 1000 companies and U.S. federal government agencies.
Why Should You Sell EFOR?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.6% annually over the last two years
- Projected sales for the next 12 months are flat and suggest demand will be subdued
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
Everforth’s stock price of $20.61 implies a valuation ratio of 5.6x forward P/E. Read our free research report to see why you should think twice about including EFOR in your portfolio.
California Resources (CRC)
Market Cap: $5.42 billion
Operating some of California's most productive oil fields including Elk Hills and Belridge, California Resources (NYSE:CRC) explores for and produces crude oil, natural gas, and natural gas liquids from fields across California.
Why Does CRC Worry Us?
- Efficiency has decreased over the last five years as its EBITDA margin fell by 31.2 percentage points
At $60.45 per share, California Resources trades at 9.5x forward P/E. Dive into our free research report to see why there are better opportunities than CRC.
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