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 avoid and better alternatives to consider.
United Parks & Resorts (PRKS)
Market Cap: $2.06 billion
Parent company of SeaWorld and home of the world-famous Shamu, United Parks & Resorts (NYSE: PRKS) is a theme park chain featuring marine life, live entertainment, roller coasters, and waterparks.
Why Is PRKS Risky?
- Demand for its offerings was relatively low as its number of visitors has underwhelmed
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 12.4% for the last two years
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $45.39 per share, United Parks & Resorts trades at 10.8x forward P/E. Read our free research report to see why you should think twice about including PRKS in your portfolio.
Enova (ENVA)
Market Cap: $6.05 billion
Pioneering online lending since 2004 with a massive database of over 65 terabytes of customer behavior data, Enova International (NYSE: ENVA) provides online financial services including installment loans and lines of credit to non-prime consumers and small businesses in the United States and Brazil.
Why Does ENVA Fall Short?
- Annual earnings per share growth of 8.8% underperformed its revenue over the last five years, showing its incremental sales were less profitable
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Enova is trading at $242.95 per share, or 12.5x forward P/E. Check out our free in-depth research report to learn more about why ENVA doesn’t pass our bar.
Simmons First National (SFNC)
Market Cap: $3.33 billion
With roots dating back to 1903 and a presence across Arkansas, Kansas, Missouri, Oklahoma, Tennessee, and Texas, Simmons First National (NASDAQ: SFNC) is a regional bank holding company that provides banking and financial services to individuals and businesses.
Why Do We Avoid SFNC?
- Net interest income trends were unexciting over the last five years as its 5.4% annual growth was below the typical banking firm
- Projected 18.7 percentage point efficiency ratio increase over the next year signals its day-to-day expenses will rise
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 4.5% annually while its revenue grew
Simmons First National’s stock price of $23.01 implies a valuation ratio of 0.9x forward P/B. If you’re considering SFNC for your portfolio, see our FREE research report to learn more.
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