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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Pangaea (PANL)
Market Cap: $604.3 million
Established in 1996, Pangaea Logistics (NASDAQ: PANL) specializes in global logistics and transportation services, focusing on the shipment of dry bulk cargoes.
Why Is PANL Not Exciting?
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 19.1%
- Earnings per share have contracted by 33.6% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.6% for the last five years
Pangaea is trading at $9.29 per share, or 8.7x forward P/E. To fully understand why you should be careful with PANL, check out our full research report (it’s free).
Heartland Express (HTLD)
Market Cap: $910.8 million
Founded by the son of a trucker, Heartland Express (NASDAQ: HTLD) offers full-truckload deliveries across the United States and Mexico.
Why Should You Sell HTLD?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 18.3% annually over the last two years
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 12 percentage points
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Heartland Express’s stock price of $11.21 implies a valuation ratio of 7.9x forward EV-to-EBITDA. If you’re considering HTLD for your portfolio, see our FREE research report to learn more.
American Woodmark (AMWD)
Market Cap: $836 million
Starting as a small millwork shop, American Woodmark (NASDAQ: AMWD) is a cabinet manufacturing company that helps customers from inspiration to installation.
Why Do We Avoid AMWD?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Projected sales decline of 5.4% over the next 12 months indicates demand will continue deteriorating
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
At $57.34 per share, American Woodmark trades at 31.8x forward P/E. Read our free research report to see why you should think twice about including AMWD in your portfolio.
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