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 to steer clear of and some alternatives to watch instead.
E.W. Scripps (SSP)
Market Cap: $325.9 million
Founded as a chain of daily newspapers, E.W. Scripps (NASDAQ: SSP) is a diversified media enterprise operating a range of local television stations, national networks, and digital media platforms.
Why Is SSP Risky?
- 1.6% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Returns on capital haven’t budged, indicating management couldn’t drive additional value creation
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
E.W. Scripps’s stock price of $3.56 implies a valuation ratio of 0.1x forward price-to-sales. Check out our free in-depth research report to learn more about why SSP doesn’t pass our bar.
Mercury Systems (MRCY)
Market Cap: $6.7 billion
Founded in 1981, Mercury Systems (NASDAQ: MRCY) specializes in providing processing subsystems and components for primarily defense applications.
Why Does MRCY Fall Short?
- Annual revenue growth of 1.7% over the last five years was below our standards for the industrials sector
- Historical operating margin losses point to an inefficient cost structure
- Issuance of new shares over the last five years caused its earnings per share to fall by 13.6% annually while its revenue grew
Mercury Systems is trading at $111.73 per share, or 81.4x forward P/E. If you’re considering MRCY for your portfolio, see our FREE research report to learn more.
Ibotta (IBTA)
Market Cap: $757.8 million
Originally launched as a way to make grocery shopping more rewarding for budget-conscious consumers, Ibotta (NYSE: IBTA) is a mobile shopping app that allows consumers to earn cash back on everyday purchases by completing tasks and submitting receipts.
Why Do We Think Twice About IBTA?
- 1.2% annual revenue growth over the last two years was slower than its business services peers
- Smaller revenue base of $340.3 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Falling earnings per share over the last one years has some investors worried as stock prices ultimately follow EPS over the long term
At $32.87 per share, Ibotta trades at 21.4x forward P/E. Read our free research report to see why you should think twice about including IBTA in your portfolio.
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