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.
Astec (ASTE)
Market Cap: $1.10 billion
Inventing the first ever double-barrel hot-mix asphalt plant, Astec (NASDAQ: ASTE) provides machines and equipment for building roads, processing raw materials, and producing concrete.
Why Does ASTE Fall Short?
- Annual sales declines of 2% for the past two years show its products and services struggled to connect with the market during this cycle
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 28.2% declines over the past two years
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.9% for the last five years
At $48 per share, Astec trades at 16.7x forward P/E. Dive into our free research report to see why there are better opportunities than ASTE.
Sphere Entertainment (SPHR)
Market Cap: $2.35 billion
Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE: SPHR) hosts live entertainment events and distributes content across various media platforms.
Why Should You Dump SPHR?
- 7.6% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Cash-burning history makes us doubt the long-term viability of its business model
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Sphere Entertainment is trading at $66.25 per share, or 12.6x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SPHR in your portfolio.
PROG (PRG)
Market Cap: $1.23 billion
Evolving from its origins as Aaron's, Inc. before rebranding in 2020, PROG Holdings (NYSE: PRG) provides alternative payment solutions including lease-to-own options and second-look credit products for consumers who may not qualify for traditional financing.
Why Do We Steer Clear of PRG?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 6.2% annually
- Annual tangible book value per share declines of 12.9% for the past five years show its capital management struggled during this cycle
PROG’s stock price of $31.14 implies a valuation ratio of 9.1x forward P/E. To fully understand why you should be careful with PRG, check out our full research report (it’s free for active Edge members).
Stocks We Like More
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