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. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Sinclair (SBGI)
Market Cap: $1.03 billion
With over 2,400 hours of local news produced weekly and 640 broadcast channels reaching millions of American homes, Sinclair (NASDAQ: SBGI) operates a network of 185 local television stations across 86 U.S. markets, producing news programming and distributing content from major networks.
Why Should You Sell SBGI?
- Annual sales declines of 11.8% for the past five years show its products and services struggled to connect with the market during this cycle
- Waning returns on capital imply its previous profit engines are losing steam
- 8× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Sinclair’s stock price of $14.37 implies a valuation ratio of 21.6x forward P/E. Dive into our free research report to see why there are better opportunities than SBGI.
Marcus & Millichap (MMI)
Market Cap: $997.1 million
Founded in 1971, Marcus & Millichap (NYSE: MMI) specializes in commercial real estate investment sales, financing, research, and advisory services.
Why Should You Dump MMI?
- 1% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Poor free cash flow margin of 5% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Marcus & Millichap is trading at $26.20 per share, or 39.4x forward P/E. To fully understand why you should be careful with MMI, check out our full research report (it’s free).
Sphere Entertainment (SPHR)
Market Cap: $4.56 billion
Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE: SPHR) hosts live entertainment events and distributes content across various media platforms.
Why Do We Avoid SPHR?
- Lackluster 18.1% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 7.5% for the last two years
- Unprofitable operations could lead to additional rounds of dilutive equity financing if the credit window closes
At $128.52 per share, Sphere Entertainment trades at 22.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why SPHR doesn’t pass our bar.
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