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. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Driven Brands (DRVN)
Market Cap: $3.11 billion
With approximately 5,000 locations across 49 U.S. states and 13 other countries, Driven Brands (NASDAQ: DRVN) operates a network of automotive service centers offering maintenance, car washes, paint, collision repair, and glass services across North America.
Why Does DRVN Give Us Pause?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Driven Brands is trading at $18.92 per share, or 13.6x forward P/E. Read our free research report to see why you should think twice about including DRVN in your portfolio.
Pangaea (PANL)
Market Cap: $349 million
Established in 1996, Pangaea Logistics (NASDAQ: PANL) specializes in global logistics and transportation services, focusing on the shipment of dry bulk cargoes.
Why Does PANL Worry Us?
- Sales trends were unexciting over the last two years as its 3.2% annual growth was below the typical industrials company
- Earnings per share fell by 41.1% annually over the last two years while its revenue grew, partly because it diluted shareholders
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Pangaea’s stock price of $5.40 implies a valuation ratio of 10x forward P/E. Dive into our free research report to see why there are better opportunities than PANL.
SoundHound AI (SOUN)
Market Cap: $5.81 billion
Born from the idea that machines should understand human speech as naturally as people do, SoundHound AI (NASDAQ: SOUN) develops voice recognition and conversational intelligence technology that enables businesses to integrate voice assistants into their products and services.
Why Is SOUN Not Exciting?
- Gross margin of 40.5% reflects its high servicing costs
- Efficiency fell over the last year as its operating margin declined by 43.6 percentage points because it pursued growth instead of profits
- Cash burn makes us question whether it can achieve sustainable long-term growth
At $14.12 per share, SoundHound AI trades at 30.5x forward price-to-sales. Check out our free in-depth research report to learn more about why SOUN doesn’t pass our bar.
Stocks We Like More
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