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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Accel Entertainment (ACEL)
Market Cap: $954.8 million
Established in Illinois, Accel Entertainment (NYSE: ACEL) is a provider of electronic gaming machines and interactive amusement terminals to bars and entertainment venues.
Why Does ACEL Fall Short?
- Number of video gaming terminals sold has disappointed over the past two years, indicating weak demand for its offerings
- Estimated sales growth of 6.5% for the next 12 months implies demand will slow from its two-year trend
- Poor free cash flow margin of 4.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Accel Entertainment’s stock price of $11.28 implies a valuation ratio of 12.2x forward P/E. To fully understand why you should be careful with ACEL, check out our full research report (it’s free).
Karat Packaging (KRT)
Market Cap: $632.2 million
Founded as Lollicup, Karat Packaging (NASDAQ: KRT) distributes and manufactures environmentally-friendly disposable foodservice packaging solutions.
Why Does KRT Give Us Pause?
- Annual revenue growth of 2.1% over the last two years was below our standards for the industrials sector
- Earnings per share lagged its peers over the last two years as they only grew by 5.9% annually
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Karat Packaging is trading at $31.30 per share, or 11.6x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including KRT in your portfolio.
Alight (ALIT)
Market Cap: $2.87 billion
Born from a corporate spinoff in 2017 to focus on employee experience technology, Alight (NYSE: ALIT) provides human capital management solutions that help companies administer employee benefits, payroll, and workforce management systems.
Why Do We Pass on ALIT?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.9% annually over the last five years
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging
At $5.43 per share, Alight trades at 8.6x forward P/E. Check out our free in-depth research report to learn more about why ALIT doesn’t pass our bar.
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