3 Russell 2000 Stocks That Concern Us

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.

Wabash (WNC)

Market Cap: $279 million

With its first trailer reportedly built on two sawhorses, Wabash (NYSE:WNC) offers semi trailers, liquid transportation containers, truck bodies, and equipment for moving goods.

Why Do We Think WNC Will Underperform?

1. Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 29% declines over the past two years
2. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

At $6.93 per share, Wabash trades at 0.2x trailing 12-month price-to-sales. To fully understand why you should be careful with WNC, check out our full research report (it’s free).

Ducommun (DCO)

Market Cap: $2.28 billion

California’s oldest company, Ducommun (NYSE:DCO) is a provider of engineering and manufacturing services for high-performance products primarily within the aerospace and defense industries.

Why Are We Cautious About DCO?

1. Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 16% declines over the past two years
2. Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 11.2 percentage points
3. ROIC of 2.4% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging

Ducommun’s stock price of $151.36 implies a valuation ratio of 32.2x forward P/E. Read our free research report to see why you should think twice about including DCO in your portfolio.

Ziff Davis (ZD)

Market Cap: $1.49 billion

Originally a pioneering technology publisher founded in 1927 that became famous for PC Magazine, Ziff Davis (NASDAQ:ZD) operates a portfolio of digital media brands and subscription services across technology, shopping, gaming, healthcare, and cybersecurity markets.

Why Should You Dump ZD?

1. Sales were flat over the last five years, indicating it’s failed to expand this cycle
2. Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 9.2 percentage points
3. Earnings per share fell by 7% annually over the last five years while its revenue was flat, showing each sale was less profitable

Ziff Davis is trading at $40.52 per share, or 7.9x forward P/E. Dive into our free research report to see why there are better opportunities than ZD.

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