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.
Caleres (CAL)
Market Cap: $433.5 million
The owner of Dr. Scholl's, Caleres (NYSE: CAL) is a footwear company offering a range of styles.
Why Do We Avoid CAL?
- Annual revenue growth of 5.4% over the last five years was below our standards for the consumer discretionary sector
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Caleres is trading at $12.81 per share, or 8.5x forward P/E. Dive into our free research report to see why there are better opportunities than CAL.
Rush Street Interactive (RSI)
Market Cap: $2.32 billion
Specializing in online casino gaming and sports betting, Rush Street Interactive (NYSE: RSI) is an operator of digital gaming platforms.
Why Do We Pass on RSI?
- 28.1% annual revenue growth over the last two years was slower than its consumer discretionary peers
- Operating margin of 5.4% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Projected 1.2 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
At $22.67 per share, Rush Street Interactive trades at 40.7x forward P/E. Check out our free in-depth research report to learn more about why RSI doesn’t pass our bar.
Clover Health (CLOV)
Market Cap: $1.13 billion
Founded in 2014 to improve healthcare for America's seniors through technology, Clover Health (NASDAQ: CLOV) provides Medicare Advantage plans for seniors with a focus on affordable care and uses its proprietary Clover Assistant software to help physicians manage patient care.
Why Does CLOV Fall Short?
- Modest revenue base of $1.92 billion means it has less operating leverage but can also grow faster if it executes the right sales strategy
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Clover Health’s stock price of $2.16 implies a valuation ratio of 26.9x forward P/E. If you’re considering CLOV for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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