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.
Sweetgreen (SG)
Market Cap: $645.1 million
Founded in 2007 by three Georgetown University alum, Sweetgreen (NYSE: SG) is a casual quick service chain known for its healthy salads and bowls.
Why Do We Avoid SG?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
- Free cash flow margin shrank by 11.5 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $5.44 per share, Sweetgreen trades at 322.2x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SG in your portfolio.
Inspired (INSE)
Market Cap: $186.7 million
Specializing in digital casino gaming, Inspired (NASDAQ: INSE) is a provider of gaming hardware, virtual sports platforms, and server-based gaming systems.
Why Do We Steer Clear of INSE?
- Sales trends were unexciting over the last five years as its 8.8% annual growth was below the typical consumer discretionary company
- Operating margin of 10.2% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Inspired is trading at $6.92 per share, or 23x forward P/E. Dive into our free research report to see why there are better opportunities than INSE.
RE/MAX (RMAX)
Market Cap: $117.4 million
Short for Real Estate Maximums, RE/MAX (NYSE: RMAX) operates a real estate franchise network spanning over 100 countries and territories.
Why Do We Think RMAX Will Underperform?
- Performance surrounding its agents has lagged its peers
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 7.1% annually while its revenue grew
- Projected 5.5 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
RE/MAX’s stock price of $5.83 implies a valuation ratio of 4.4x forward P/E. To fully understand why you should be careful with RMAX, check out our full research report (it’s free).
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