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 steer clear of and some alternatives to watch instead.
Advance Auto Parts (AAP)
Market Cap: $3.53 billion
Founded in Virginia in 1932, Advance Auto Parts (NYSE:AAP) is an auto parts and accessories retailer that sells everything from carburetors to motor oil to car floor mats.
Why Should You Sell AAP?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Overall productivity fell over the last year as its plummeting sales were accompanied by a decline in its operating margin
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Advance Auto Parts is trading at $59.05 per share, or 27.6x forward P/E. If you’re considering AAP for your portfolio, see our FREE research report to learn more.
Hilton Grand Vacations (HGV)
Market Cap: $3.90 billion
Spun off from Hilton Worldwide in 2017, Hilton Grand Vacations (NYSE:HGV) is a global timeshare company that provides travel experiences for its customers through its timeshare resorts and club membership programs.
Why Does HGV Fall Short?
- Muted 11.2% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
- High net-debt-to-EBITDA ratio of 15× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Hilton Grand Vacations’s stock price of $43.70 implies a valuation ratio of 11.8x forward P/E. Check out our free in-depth research report to learn more about why HGV doesn’t pass our bar.
AdaptHealth (AHCO)
Market Cap: $1.21 billion
With a network of approximately 680 locations serving patients across all 50 states, AdaptHealth (NASDAQ:AHCO) provides home medical equipment, supplies, and related services to patients with chronic conditions like sleep apnea, diabetes, and respiratory disorders.
Why Are We Hesitant About AHCO?
- Muted 2.7% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $9.44 per share, AdaptHealth trades at 7.6x forward P/E. Dive into our free research report to see why there are better opportunities than AHCO.
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