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.
Scorpio Tankers (STNG)
Market Cap: $3.52 billion
Operating one of the youngest fleets in the industry, Scorpio Tankers (NYSE: STNG) is an international provider of marine transportation services, specializing in the shipment of refined petroleum.
Why Is STNG Not Exciting?
- Sluggish trends in its total vessels suggest customers aren’t adopting its solutions as quickly as the company hoped
- Forecasted revenue decline of 24.9% for the upcoming 12 months implies demand will fall even further
- Earnings per share have dipped by 6% annually over the past two years, which is concerning because stock prices follow EPS over the long term
At $77.23 per share, Scorpio Tankers trades at 11.4x forward P/E. To fully understand why you should be careful with STNG, check out our full research report (it’s free).
Kodiak Gas Services (KGS)
Market Cap: $6.08 billion
Dominating the Permian Basin with a fleet focused on large horsepower units exceeding 1,000 horsepower each, Kodiak Gas Services (NYSE:KGS) operates compression equipment that maintains natural gas pressure for production, gathering, and transportation.
Why Does KGS Give Us Pause?
- Smaller revenue base of $1.39 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Costs have risen faster than its revenue over the last five years, causing its EBITDA margin to decline by 2.3 percentage points
- Low free cash flow margin of 3.3% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Kodiak Gas Services’s stock price of $60.23 implies a valuation ratio of 22.4x forward P/E. Dive into our free research report to see why there are better opportunities than KGS.
Atmus Filtration Technologies (ATMU)
Market Cap: $3.98 billion
Spun out of Cummins in 2023 after 65 years as part of the engine maker, Atmus Filtration Technologies (NYSE:ATMU) manufactures filters for trucks, construction equipment, and agriculture machinery to reduce emissions and protect engines.
Why Does ATMU Fall Short?
- Sales trends were unexciting over the last five years as its 6.1% annual growth was below the typical industrials company
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 26.7%
Atmus Filtration Technologies is trading at $48.82 per share, or 15.8x forward P/E. Read our free research report to see why you should think twice about including ATMU in your portfolio.
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