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.
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.
Hertz (HTZ)
Market Cap: $1.86 billion
Started with a dozen Model T Fords, Hertz (NASDAQ: HTZ) is a global car rental company providing vehicle rental services to leisure and business travelers.
Why Are We Out on HTZ?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.8% annually over the last two years
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Hertz’s stock price of $5.97 implies a valuation ratio of 0.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than HTZ.
Navient (NAVI)
Market Cap: $741.6 million
Spun off from Sallie Mae in 2014 to handle the company's loan servicing and collection operations, Navient (NASDAQ: NAVI) provides education loan servicing and business processing solutions that help manage federal student loans, private education loans, and government services.
Why Do We Think NAVI Will Underperform?
- Sales tumbled by 21.3% annually over the last five years, showing market trends are working against its favor during this cycle
- Earnings per share have dipped by 15.9% annually over the past five years, which is concerning because stock prices follow EPS over the long term
Navient is trading at $7.89 per share, or 11.2x forward P/E. If you’re considering NAVI for your portfolio, see our FREE research report to learn more.
Select Water Solutions (WTTR)
Market Cap: $2.28 billion
Managing over 24 billion barrels of produced water annually across major U.S. shale plays, Select Water Solutions (NYSE: WTTR) provides water sourcing, recycling, disposal, and treatment services for oil and gas producers.
Why Does WTTR Worry Us?
- Smaller revenue base of $1.40 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Costly operations and weak unit economics result in an inferior gross margin of 23.5% that must be offset through higher production volumes
- Poor free cash flow margin of 0.2% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $18.23 per share, Select Water Solutions trades at 1.3x forward price-to-sales. Check out our free in-depth research report to learn more about why WTTR doesn’t pass our bar.
Stocks We Like More
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