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.
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 that don’t make the cut and some better choices instead.
Arhaus (ARHS)
Market Cap: $818.1 million
With an aesthetic that features natural materials such as reclaimed wood, Arhaus (NASDAQ:ARHS) is a high-end furniture retailer that sells everything from sofas to rugs to bookcases.
Why Does ARHS Fall Short?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Smaller revenue base of $1.38 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Performance over the past three years shows its incremental sales were much less profitable, as its earnings per share fell by 25.6% annually
Arhaus is trading at $5.88 per share, or 12.1x forward P/E. To fully understand why you should be careful with ARHS, check out our full research report (it’s free).
Sweetgreen (SG)
Market Cap: $1.03 billion
Founded in 2007 by three Georgetown University alum, Sweetgreen (NYSE:SG) is a casual quick service chain known for its healthy salads and bowls.
Why Should You Sell SG?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- 8.7 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Sweetgreen’s stock price of $8.63 implies a valuation ratio of 175.6x forward EV-to-EBITDA. If you’re considering SG for your portfolio, see our FREE research report to learn more.
United Natural Foods (UNFI)
Market Cap: $3.05 billion
With a vast network of 55 distribution centers spanning approximately 30 million square feet of warehouse space, United Natural Foods (NYSE:UNFI) is North America’s premier grocery wholesaler distributing natural, organic, and conventional products to over 30,000 retail locations across the US and Canada.
Why Do We Avoid UNFI?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 1.8% for the last three years
- Earnings per share fell by 29.3% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable
- High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $50.05 per share, United Natural Foods trades at 17.6x forward P/E. Dive into our free research report to see why there are better opportunities than UNFI.
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