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.
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. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
1-800-FLOWERS (FLWS)
Market Cap: $328 million
Founded in 1976, 1-800-FLOWERS (NASDAQ: FLWS) is an online retailer of flowers, gifts, and gourmet foods, serving customers globally.
Why Are We Out on FLWS?
- Products and services have few die-hard fans as sales have declined by 9.9% annually over the last two years
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 24.2% annually while its revenue grew
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
1-800-FLOWERS’s stock price of $5.37 implies a valuation ratio of 17.6x forward P/E. Check out our free in-depth research report to learn more about why FLWS doesn’t pass our bar.
Heartland Express (HTLD)
Market Cap: $685 million
Founded by the son of a trucker, Heartland Express (NASDAQ: HTLD) offers full-truckload deliveries across the United States and Mexico.
Why Do We Pass on HTLD?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 6.8% annually over the last two years
- 10.8 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Heartland Express is trading at $8.92 per share, or 4.4x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than HTLD.
Fulton Financial (FULT)
Market Cap: $3.11 billion
Tracing its roots back to 1882 in the heart of Pennsylvania, Fulton Financial (NASDAQ: FULT) is a financial holding company that provides banking, lending, and wealth management services to consumers and businesses across five Mid-Atlantic states.
Why Are We Hesitant About FULT?
- Estimated net interest income growth of 3.1% for the next 12 months implies demand will slow from its four-year trend
- Capital trends were unexciting over the last five years as its 4.4% annual tangible book value per share growth was below the typical bank company
- Estimated tangible book value per share growth of 7.3% for the next 12 months implies profitability will slow from its two-year trend
At $17.10 per share, Fulton Financial trades at 1x forward P/B. Read our free research report to see why you should think twice about including FULT in your portfolio.
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