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. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
The Cheesecake Factory (CAKE)
Market Cap: $3.08 billion
Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ:CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.
Why Do We Think Twice About CAKE?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Poor expense management has led to an operating margin of 4.5% that is below the industry average
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
The Cheesecake Factory’s stock price of $61.90 implies a valuation ratio of 15.7x forward P/E. Check out our free in-depth research report to learn more about why CAKE doesn’t pass our bar.
G-III (GIII)
Market Cap: $1.05 billion
Founded as a small leather goods business, G-III (NASDAQ:GIII) is a fashion and apparel conglomerate with a diverse portfolio of brands.
Why Should You Sell GIII?
- Sales were flat over the last two years, indicating it’s failed to expand its business
- Forecasted revenue decline of 1.3% for the upcoming 12 months implies demand will fall off a cliff
- Low returns on capital reflect management’s struggle to allocate funds effectively
G-III is trading at $24.24 per share, or 6.3x forward P/E. Read our free research report to see why you should think twice about including GIII in your portfolio.
Tandem Diabetes (TNDM)
Market Cap: $778.4 million
With technology that automatically adjusts insulin delivery based on continuous glucose monitoring data, Tandem Diabetes Care (NASDAQ:TNDM) develops and manufactures automated insulin delivery systems that help people with diabetes manage their blood glucose levels.
Why Is TNDM Risky?
- Disappointing pump shipments over the past two years indicate demand is soft and that the company may need to revise its strategy
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 21% annually
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $11.60 per share, Tandem Diabetes trades at 14.5x forward EV-to-EBITDA. To fully understand why you should be careful with TNDM, check out our full research report (it’s free).
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