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.
Agilysys (AGYS)
Market Cap: $2.96 billion
With a tech stack that powers everything from check-in to checkout at some of the world's top hospitality venues, Agilysys (NASDAQ:AGYS) develops and provides cloud-based and on-premise software solutions for hotels, resorts, casinos, and restaurants to manage operations and enhance guest experiences.
Why Are We Cautious About AGYS?
- High servicing costs result in a relatively inferior gross margin of 63.1% that must be offset through increased usage
- Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 4.8 percentage points
Agilysys is trading at $105.16 per share, or 7.7x forward price-to-sales. Read our free research report to see why you should think twice about including AGYS in your portfolio.
Zumiez (ZUMZ)
Market Cap: $331.9 million
With store associates called “Zumiez Stash Members”, Zumiez (NASDAQ:ZUMZ) is a specialty retailer of street and skate apparel, footwear, and accessories.
Why Are We Bearish on ZUMZ?
- Reduction in its number of stores signals a focus on profitability through targeted consolidation
- Revenue base of $938.1 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging
Zumiez’s stock price of $19.67 implies a valuation ratio of 19.4x forward P/E. Dive into our free research report to see why there are better opportunities than ZUMZ.
Casella Waste Systems (CWST)
Market Cap: $5.71 billion
Starting with the founder picking up garbage with a pickup truck he purchased using savings from high school, Casella (NASDAQ:CWST) offers waste management services for businesses, residents, and the government.
Why Do We Think Twice About CWST?
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 4.6 percentage points
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $89.71 per share, Casella Waste Systems trades at 77.4x forward P/E. Read our free research report to see why you should think twice about including CWST in your portfolio.
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