3 Russell 2000 Stocks We Think Twice About

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.

Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.

Kura Sushi (KRUS)

Market Cap: $662.7 million

Known for its conveyor belt that transports dishes to diners, Kura Sushi (NASDAQ:KRUS) is a chain of sushi restaurants serving traditional Japanese fare with a touch of modernity and technology.

Why Is KRUS Not Exciting?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
2. Cash burn has widened over the last year, making us question whether it can reliably generate shareholder value
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

Kura Sushi is trading at $55.99 per share, or 29.1x forward EV-to-EBITDA. If you’re considering KRUS for your portfolio, see our FREE research report to learn more.

Hertz (HTZ)

Market Cap: $1.55 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 Should You Dump HTZ?

1. Underwhelming unit sales over the past two years imply it may need to invest in improvements to get back on track
2. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

Hertz’s stock price of $5.06 implies a valuation ratio of 10.3x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why HTZ doesn’t pass our bar.

GEO Group (GEO)

Market Cap: $2.29 billion

With a global footprint spanning three continents and approximately 81,000 beds across 100 facilities, GEO Group (NYSE:GEO) operates secure facilities, processing centers, and reentry services for government agencies in the United States, Australia, and South Africa.

Why Do We Avoid GEO?

1. Flat sales over the last five years suggest it must find different ways to grow during this cycle
2. Earnings per share fell by 12% annually over the last five years while its revenue was flat, showing each sale was less profitable
3. Free cash flow margin shrank by 7.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

At $16.84 per share, GEO Group trades at 11.9x forward P/E. Dive into our free research report to see why there are better opportunities than GEO.

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