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 steer clear of and some alternatives to watch instead.
CTS (CTS)
Market Cap: $1.16 billion
With roots dating back to 1896 and a global manufacturing footprint, CTS (NYSE: CTS) designs and manufactures sensors, connectivity components, and actuators for aerospace, defense, industrial, medical, and transportation markets.
Why Are We Wary of CTS?
- Sales tumbled by 5.7% annually over the last two years, showing market trends are working against its favor during this cycle
- Modest revenue base of $520.9 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Earnings per share have contracted by 4.5% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
CTS’s stock price of $39.32 implies a valuation ratio of 16.4x forward P/E. If you’re considering CTS for your portfolio, see our FREE research report to learn more.
AerSale (ASLE)
Market Cap: $395.4 million
Providing a one-stop shop that integrates multiple services and product offerings, AerSale (NASDAQ: ASLE) delivers full-service support to mid-life commercial aircraft.
Why Do We Steer Clear of ASLE?
- 3.7% annual revenue growth over the last five years was slower than its industrials peers
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $8.38 per share, AerSale trades at 25.4x forward P/E. Read our free research report to see why you should think twice about including ASLE in your portfolio.
Artivion (AORT)
Market Cap: $1.94 billion
Formerly known as CryoLife until its 2022 rebranding, Artivion (NYSE: AORT) develops and manufactures medical devices and preserves human tissues used in cardiac and vascular surgical procedures for patients with aortic disease.
Why Does AORT Fall Short?
- Smaller revenue base of $405 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Poor free cash flow margin of -0.6% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Artivion is trading at $41.06 per share, or 54.9x forward P/E. Check out our free in-depth research report to learn more about why AORT doesn’t pass our bar.
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