Jabin Bastian
3 min read
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. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Qualys (QLYS)
Market Cap: $6.03 billion
Originally developed to address the growing complexity of IT security in the cloud era, Qualys (NASDAQ:QLYS) provides a cloud-based platform that helps organizations identify, manage, and protect their IT assets from cyber threats across on-premises, cloud, and mobile environments.
Why Are We Cautious About QLYS?
-
Average ARR growth of 10.3% over the last year has disappointed, suggesting it’s had a hard time winning long-term deals and renewals
-
Anticipated sales growth of 8.9% for the next year implies demand will be shaky
-
Operating margin improvement of 3.4 percentage points over the last year demonstrates its ability to scale efficiently
Qualys’s stock price of $175.70 implies a valuation ratio of 7.8x forward price-to-sales. Read our free research report to see why you should think twice about including QLYS in your portfolio, it’s free.
Cushman & Wakefield (CWK)
Market Cap: $3.16 billion
With expertise in the commercial real estate sector, Cushman & Wakefield (NYSE:CWK) is a global Chicago-based real estate firm offering a comprehensive range of services to clients.
Why Do We Avoid CWK?
-
Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 5.2% for the last five years
-
Poor free cash flow margin of 1.5% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
-
Returns on capital haven’t budged, indicating management couldn’t drive additional value creation
At $13.48 per share, Cushman & Wakefield trades at 8.4x forward P/E. To fully understand why you should be careful with CWK, check out our full research report (it’s free).
Concentrix (CNXC)
Market Cap: $2.00 billion
With a team of approximately 450,000 employees across 75 countries, Concentrix (NASDAQ:CNXC) designs and delivers customer experience solutions that help global brands manage their customer interactions across digital channels and contact centers.
