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.
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 that don’t make the cut and some better choices instead.
Market Cap: $1.48 billion
Cooling America’s first indoor ice rink in the 19th century, Enviri (NYSE:NVRI) offers steel and waste handling services.
Why Do We Pass on NVRI?
-
Sales stagnated over the last two years and signal the need for new growth strategies
-
Negative free cash flow raises questions about the return timeline for its investments
-
5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Enviri’s stock price of $18.36 implies a valuation ratio of 10.4x forward EV-to-EBITDA. To fully understand why you should be careful with NVRI, check out our full research report (it’s free).
Market Cap: $1.39 billion
With a network of approximately 680 locations serving patients across all 50 states, AdaptHealth (NASDAQ:AHCO) provides home medical equipment, supplies, and related services to patients with chronic conditions like sleep apnea, diabetes, and respiratory disorders.
Why Is AHCO Not Exciting?
-
Muted 2.1% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
-
Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 1.3% annually
-
Underwhelming 1.3% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
At $10.49 per share, AdaptHealth trades at 12.4x forward P/E. Check out our free in-depth research report to learn more about why AHCO doesn’t pass our bar.
Market Cap: $2.64 billion
With its iconic blimp floating above major sporting events since 1925, Goodyear (NYSE:GT) is one of the world’s largest tire manufacturers, producing and selling tires for automobiles, trucks, aircraft, and other vehicles, along with related services.
Why Should You Dump GT?
-
Declining unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
-
5.2 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
-
Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up