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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Monarch (MCRI)
Market Cap: $1.47 billion
Established in 1993, Monarch (NASDAQ: MCRI) operates luxury casinos and resorts, offering high-end gaming, dining, and hospitality experiences.
Why Does MCRI Fall Short?
- Muted 4% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Estimated sales growth of 2% for the next 12 months implies demand will slow from its two-year trend
- Underwhelming 14.4% return on capital reflects management’s difficulties in finding profitable growth opportunities
Monarch is trading at $79.83 per share, or 8.2x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including MCRI in your portfolio.
Frontdoor (FTDR)
Market Cap: $3.93 billion
Established in 2018 as a spin-off from ServiceMaster Global Holdings, Frontdoor (NASDAQ: FTDR) is a provider of home warranty and service plans.
Why Are We Hesitant About FTDR?
- Demand for its offerings was relatively low as its number of home service plans has underwhelmed
- Projected 2.4 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- Eroding returns on capital suggest its historical profit centers are aging
At $53.45 per share, Frontdoor trades at 17.5x forward P/E. If you’re considering FTDR for your portfolio, see our FREE research report to learn more.
Interface (TILE)
Market Cap: $1.20 billion
Pioneering carbon-neutral flooring since its founding in 1973, Interface (NASDAQ: TILE) is a global manufacturer of modular carpet tiles, luxury vinyl tile (LVT), and rubber flooring that specializes in carbon-neutral and sustainable flooring solutions.
Why Is TILE Risky?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Sales over the last five years were less profitable as its earnings per share fell by 16.7% annually while its revenue was flat
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Interface’s stock price of $20.42 implies a valuation ratio of 7.4x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why TILE doesn’t pass our bar.
Stocks We Like More
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