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 to steer clear of and some alternatives to watch instead.
Asana (ASAN)
Market Cap: $1.67 billion
Born from the founders' frustration with the inefficiencies of email-based collaboration at Facebook, Asana (NYSE: ASAN) provides a work management platform that helps organizations track projects, set goals, and manage workflows in a centralized digital workspace.
Why Are We Out on ASAN?
- Products, pricing, or go-to-market strategy may need some adjustments as its 9.4% average billings growth over the last year was weak
- Platform has low switching costs as its net revenue retention rate of 95.7% demonstrates high turnover
- Prolonged sales cycles signal certain parts of its software must be customized for its large enterprise clients, impeding customer growth
At $7.02 per share, Asana trades at 2.1x forward price-to-sales. Dive into our free research report to see why there are better opportunities than ASAN.
Option Care Health (OPCH)
Market Cap: $4.66 billion
With a nationwide network of 177 locations serving 43 states and a team of over 4,500 clinicians, Option Care Health (NASDAQ: OPCH) is the largest independent provider of home and alternate site infusion services, delivering medications and clinical support to patients across the United States.
Why Does OPCH Fall Short?
- Free cash flow margin shrank by 1.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Option Care Health is trading at $29.68 per share, or 15.9x forward P/E. Read our free research report to see why you should think twice about including OPCH in your portfolio.
Westamerica Bancorporation (WABC)
Market Cap: $1.22 billion
Founded in 1884 and serving communities from Mendocino County in the north to Kern County in the south, Westamerica Bancorporation (NASDAQ: WABC) provides banking services to individuals and small businesses throughout Northern and Central California.
Why Do We Think WABC Will Underperform?
- Muted 5.9% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Concessions to defend its market share have ramped up over the last two years as its net interest margin decreased by 48.9 basis points (100 basis points = 1 percentage point)
- Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
Westamerica Bancorporation’s stock price of $49.96 implies a valuation ratio of 1.3x forward P/B. To fully understand why you should be careful with WABC, check out our full research report (it’s free).
Stocks We Like More
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