3 Russell 2000 Stocks We Steer Clear Of

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.

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 avoid and better alternatives to consider.

Academy Sports (ASO)

Market Cap: $3.43 billion

Founded in 1938 as a tire shop before expanding into fishing equipment, Academy Sports & Outdoor (NASDAQ:ASO) sells a broad selection of sporting goods but is still known for its outdoor activity merchandise.

Why Do We Think Twice About ASO?

1. Annual revenue growth of 3.8% over the last six years was below our standards for the consumer retail sector
2. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
3. Capital intensity has ramped up over the last year as its free cash flow margin decreased by 3.4 percentage points

At $51.31 per share, Academy Sports trades at 8.5x forward P/E. Check out our free in-depth research report to learn more about why ASO doesn’t pass our bar.

Select Medical (SEM)

Market Cap: $1.61 billion

With a nationwide network spanning 46 states and over 2,700 healthcare facilities, Select Medical (NYSE:SEM) operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers across the United States.

Why Do We Avoid SEM?

1. Declining admissions over the past two years suggest it might have to lower prices to accelerate growth
2. Forecasted revenue decline of 4.5% for the upcoming 12 months implies demand will fall even further
3. Incremental sales over the last five years were much less profitable as its earnings per share fell by 3.4% annually while its revenue grew

Select Medical’s stock price of $12.99 implies a valuation ratio of 11.1x forward P/E. Dive into our free research report to see why there are better opportunities than SEM.

EchoStar (SATS)

Market Cap: $7.91 billion

Following its 2023 acquisition of DISH Network, EchoStar (NASDAQ:SATS) provides satellite communications, pay-TV services, wireless networks, and broadband solutions across consumer and enterprise markets.

Why Do We Think SATS Will Underperform?

1. Earnings per share fell by 8.1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
2. 10.8 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

EchoStar is trading at $27.75 per share, or 5.7x forward EV-to-EBITDA. If you’re considering SATS for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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