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.
The high-risk, high-reward nature of the Russell 2000 makes stock selection critical, and we’re here to guide you toward the right ones. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
Evolent Health (EVH)
Market Cap: $431.9 million
Founded in 2011 to transform how healthcare is delivered to patients with complex needs, Evolent Health (NYSE: EVH) provides specialty care management services and technology solutions that help health plans and providers deliver better care for patients with complex conditions.
Why Do We Think Twice About EVH?
- Disappointing average lives on platform over the past two years imply it may need to invest in improvements to get back on track
- Negative returns on capital show management lost money while trying to expand the business, and its falling returns suggest its earlier profit pools are drying up
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Evolent Health is trading at $3.84 per share, or 15x forward P/E. Dive into our free research report to see why there are better opportunities than EVH.
CNO Financial Group (CNO)
Market Cap: $4.42 billion
Rebranded from Conseco in 2010 to signal a fresh start after navigating financial challenges, CNO Financial Group (NYSE: CNO) develops and markets health insurance, annuities, and life insurance products primarily targeting middle-income pre-retirees and retirees.
Why Are We Out on CNO?
- Growth in insurance policies was lackluster over the last five years as its 1% annual growth underperformed the typical financial institution
- Expenses have increased as a percentage of revenue over the last five years as its pre-tax profit margin fell by 8.9 percentage points
- Policy losses and capital returns have eroded its book value per share this cycle as its book value per share declined by 6.2% annually over the last five years
CNO Financial Group’s stock price of $47.37 implies a valuation ratio of 1.7x forward P/B. If you’re considering CNO for your portfolio, see our FREE research report to learn more.
PROG (PRG)
Market Cap: $1.34 billion
Evolving from its origins as Aaron's, Inc. before rebranding in 2020, PROG Holdings (NYSE: PRG) provides alternative payment solutions including lease-to-own options and second-look credit products for consumers who may not qualify for traditional financing.
Why Is PRG Risky?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Earnings per share fell by 5.4% annually over the last five years while its revenue was flat, showing each sale was less profitable
- Products and services are facing significant credit quality challenges during this cycle as tangible book value per share has declined by 62.4% annually over the last five years
At $33.50 per share, PROG trades at 7.6x forward P/E. To fully understand why you should be careful with PRG, check out our full research report (it’s free).
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