Small-cap stocks in the Russell 2000 (^RUT) 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.
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. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
PagerDuty (PD)
Market Cap: $932.4 million
Born from the frustration of developers being woken up by unprioritized alerts, PagerDuty (NYSE:PD) is a digital operations management platform that helps organizations detect and respond to IT incidents, outages, and other critical issues in real-time.
Why Do We Steer Clear of PD?
- Average billings growth of 1.1% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 5.7 percentage points
PagerDuty’s stock price of $11.96 implies a valuation ratio of 1.8x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PD.
Peloton (PTON)
Market Cap: $2.44 billion
Started as a Kickstarter campaign, Peloton (NASDAQ: PTON) is a fitness technology company known for its at-home exercise equipment and interactive online workout classes.
Why Do We Avoid PTON?
- Sluggish trends in its connected fitness subscribers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Operating margin of 2.5% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Free cash flow margin is projected to show no improvement next year
At $5.51 per share, Peloton trades at 16.4x forward P/E. Read our free research report to see why you should think twice about including PTON in your portfolio.
Artisan Partners (APAM)
Market Cap: $3.03 billion
Founded in 1994 with a focus on autonomous investment teams and a "high-value-added" approach, Artisan Partners (NYSE:APAM) is an investment management firm that offers actively managed equity and fixed income strategies to institutional and individual investors.
Why Are We Bearish on APAM?
- 2.8% annual revenue growth over the last five years was slower than its financials peers
- Earnings per share fell by 1.3% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
Artisan Partners is trading at $42.69 per share, or 11x forward P/E. To fully understand why you should be careful with APAM, check out our full research report (it’s free).
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