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.
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 steer clear of and some alternatives to watch instead.
Q2 Holdings (QTWO)
Market Cap: $3.98 billion
With a platform powering digital services for approximately 25 million account holders across America, Q2 Holdings (NYSE:QTWO) provides cloud-based digital solutions that help financial institutions, fintechs, and alternative finance companies deliver modern banking experiences to their customers.
Why Is QTWO Not Exciting?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 7.7% underwhelmed
- Estimated sales growth of 9.6% for the next 12 months implies demand will slow from its two-year trend
- Sky-high servicing costs result in an inferior gross margin of 57% that must be offset through increased usage
At $65.72 per share, Q2 Holdings trades at 4.5x forward price-to-sales. To fully understand why you should be careful with QTWO, check out our full research report (it’s free).
Sprout Social (SPT)
Market Cap: $647.7 million
Born from the recognition that businesses needed a centralized way to handle their growing social media presence, Sprout Social (NASDAQ:SPT) provides a comprehensive software platform that helps businesses manage, analyze, and optimize their presence across various social media networks.
Why Are We Wary of SPT?
- Underwhelming ARR growth of 10.1% over the last year suggests the company faced challenges in acquiring and retaining long-term customers
- Estimated sales growth of 5.3% for the next 12 months implies demand will slow from its two-year trend
- Suboptimal cost structure is highlighted by its history of operating margin losses
Sprout Social is trading at $10.42 per share, or 1.3x forward price-to-sales. Read our free research report to see why you should think twice about including SPT in your portfolio.
Target Hospitality (TH)
Market Cap: $1.73 billion
Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ:TH) is a provider of specialty workforce lodging accommodations and services.
Why Do We Steer Clear of TH?
- Performance surrounding its utilized beds has lagged its peers
- Low free cash flow margin of 7.9% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Target Hospitality’s stock price of $16.74 implies a valuation ratio of 75.9x forward P/E. Dive into our free research report to see why there are better opportunities than TH.
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