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. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
American Outdoor Brands (AOUT)
Market Cap: $115.9 million
Spun off from Smith and Wesson in 2020, American Outdoor Brands (NASDAQ: AOUT) is an outdoor and recreational products company that offers outdoor and shooting sports products but does not sell firearms themselves.
Why Should You Dump AOUT?
- Flat sales over the last five years suggest it must innovate and find new ways to grow
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $9.21 per share, American Outdoor Brands trades at 41.9x forward P/E. Dive into our free research report to see why there are better opportunities than AOUT.
Meritage Homes (MTH)
Market Cap: $5.17 billion
Originally founded in 1985 in Arizona as Monterey Homes, Meritage Homes (NYSE: MTH) is a homebuilder specializing in designing and constructing energy-efficient and single-family homes in the US.
Why Are We Out on MTH?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 34.5% declines over the past two years
- Earnings per share have contracted by 19.3% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Diminishing returns on capital suggest its earlier profit pools are drying up
Meritage Homes is trading at $76.43 per share, or 12.9x forward P/E. Read our free research report to see why you should think twice about including MTH in your portfolio.
EVgo (EVGO)
Market Cap: $436.6 million
Created through a settlement between NRG Energy and the California Public Utilities Commission, EVgo (NASDAQ: EVGO) is a provider of electric vehicle charging solutions, operating fast charging stations across the United States.
Why Does EVGO Fall Short?
- Suboptimal cost structure is highlighted by its history of operating margin losses
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
EVgo’s stock price of $3.23 implies a valuation ratio of 10.8x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why EVGO doesn’t pass our bar.
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