Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
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.
Bally's (BALY)
Market Cap: $725.4 million
Headquartered in Providence, Rhode Island, Bally's Corporation (NYSE: BALY) is a diversified global casino-entertainment company that owns and manages casinos, resorts, and online gaming platforms.
Why Should You Dump BALY?
- Annual revenue growth of 6.9% over the last two years was below our standards for the consumer discretionary sector
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Bally's is trading at $14.70 per share, or 11.5x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including BALY in your portfolio.
Herc (HRI)
Market Cap: $4.76 billion
Formerly a subsidiary of Hertz Corporation and with a logo that still bears some similarities to its former parent, Herc Holdings (NYSE: HRI) provides equipment rental and related services to a wide range of industries.
Why Is HRI Not Exciting?
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 7.2 percentage points
- Revenue growth over the past two years was nullified by the company’s new share issuances as its earnings per share fell by 28% annually
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $137.57 per share, Herc trades at 20.7x forward P/E. Check out our free in-depth research report to learn more about why HRI doesn’t pass our bar.
Centrus Energy (LEU)
Market Cap: $3.12 billion
Operating the only active U.S. facility licensed to produce high-assay low-enriched uranium (HALEU) for next-generation reactors, Centrus Energy (NYSE: LEU) supplies enriched uranium, the fissile component needed to produce fuel for nuclear power reactors.
Why Should You Sell LEU?
- Modest revenue base of $452.3 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Gross margin of 32.5% is below its competitors, leaving less money to invest in exploration and production
- Efficiency has decreased over the last five years as its EBITDA margin fell by 38.7 percentage points
Centrus Energy’s stock price of $167.86 implies a valuation ratio of 36.6x forward P/E. If you’re considering LEU for your portfolio, see our FREE research report to learn more.
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