3 Russell 2000 Stocks with Questionable Fundamentals

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.

ACV Auctions (ACVA)

Market Cap: $1.93 billion

Founded in 2014, ACV Auctions (NASDAQ:ACVA) is an online auction marketplace for car dealers and wholesalers to buy and sell used cars.

Why Are We Cautious About ACVA?

1. Bad unit economics and steep infrastructure costs are reflected in its low gross margin of 26.2%
2. Expensive marketing campaigns hurt its profitability and make us wonder what would happen if it let up on the gas
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.7% for the last two years

At $11.33 per share, ACV Auctions trades at 18.6x forward EV/EBITDA. Read our free research report to see why you should think twice about including ACVA in your portfolio.

Sweetgreen (SG)

Market Cap: $970.5 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 Is SG Not Exciting?

1. Poor expense management has led to operating margin losses
2. Free cash flow margin shrank by 7.3 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Sweetgreen is trading at $8.27 per share, or 23.8x forward EV-to-EBITDA. If you’re considering SG for your portfolio, see our FREE research report to learn more.

Enviri (NVRI)

Market Cap: $937.9 million

Cooling America’s first indoor ice rink in the 19th century, Enviri (NYSE:NVRI) offers steel and waste handling services.

Why Do We Steer Clear of NVRI?

1. Annual revenue growth of 2.7% over the last two years was below our standards for the industrials sector
2. Cash-burning history makes us doubt the long-term viability of its business model
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

Enviri’s stock price of $11.63 implies a valuation ratio of 3.1x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why NVRI doesn’t pass our bar.

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