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.
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. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
iHeartMedia (IHRT)
Market Cap: $420 million
Occasionally featuring celebrity hosts like Ryan Seacrest on its shows, iHeartMedia (NASDAQ: IHRT) is a leading multimedia company renowned for its extensive network of radio stations, digital platforms, and live events across the globe.
Why Do We Steer Clear of IHRT?
- Sales were flat over the last two years, indicating it’s failed to expand its business
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
iHeartMedia’s stock price of $3.02 implies a valuation ratio of 0.6x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including IHRT in your portfolio.
Universal Logistics (ULH)
Market Cap: $656.1 million
Founded in 1932, Universal Logistics (NASDAQ: ULH) is a provider of customized transportation and logistics solutions operating throughout the United States and in Mexico, Canada, and Colombia.
Why Are We Out on ULH?
- Sales tumbled by 4.1% annually over the last two years, showing market trends are working against its favor during this cycle
- Earnings per share have dipped by 28% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Low free cash flow margin of -0.6% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $24.93 per share, Universal Logistics trades at 9.6x forward P/E. To fully understand why you should be careful with ULH, check out our full research report (it’s free).
DigitalBridge (DBRG)
Market Cap: $2.15 billion
Transforming from a traditional real estate investor to a digital-focused powerhouse in 2021, DigitalBridge Group (NYSE: DBRG) is a global digital infrastructure investment firm that manages capital and operates assets across data centers, cell towers, fiber networks, and edge infrastructure.
Why Does DBRG Worry Us?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 17.6% annually over the last five years
- ROE of 0.4% reflects management’s challenges in identifying attractive investment opportunities
DigitalBridge is trading at $11.58 per share, or 1.5x forward P/E. Dive into our free research report to see why there are better opportunities than DBRG.
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