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 to steer clear of and some alternatives to watch instead.
PlayStudios (MYPS)
Market Cap: $63.05 million
Founded by a team of former gaming industry executives, PlayStudios (NASDAQ: MYPS) offers free-to-play digital casino games.
Why Should You Sell MYPS?
- Annual revenue declines of 2.7% over the last five years indicate problems with its market positioning
- Poor free cash flow margin of 12.8% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Unchanged returns on capital make it difficult for the company’s valuation multiple to re-rate
PlayStudios’s stock price of $0.50 implies a valuation ratio of 0.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than MYPS.
RadNet (RDNT)
Market Cap: $4.97 billion
With over 350 imaging facilities across seven states and a growing artificial intelligence division, RadNet (NASDAQ: RDNT) operates a network of outpatient diagnostic imaging centers across the United States, offering services like MRI, CT scans, PET scans, mammography, and X-rays.
Why Does RDNT Fall Short?
- Smaller revenue base of $2.04 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 3 percentage points
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $64.50 per share, RadNet trades at 103.3x forward P/E. If you’re considering RDNT for your portfolio, see our FREE research report to learn more.
Artisan Partners (APAM)
Market Cap: $2.50 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 Does APAM Worry Us?
- Sales trends were unexciting over the last five years as its 5.9% annual growth was below the typical financials company
- Incremental sales over the last five years were less profitable as its 3.4% annual earnings per share growth lagged its revenue gains
Artisan Partners is trading at $35.48 per share, or 8.6x 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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