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.
Cars.com (CARS)
Market Cap: $534.4 million
Originally started as a joint venture between several media companies including The Washington Post and The New York Times, Cars.com (NYSE: CARS) is a digital marketplace that connects new and used car buyers and sellers.
Why Are We Cautious About CARS?
- Dealer Customers have stagnated over the last two years, indicating its platform may be struggling to differentiate itself from competitors
- Key performance metrics have been flashing red recently as its average revenue per buyer dropped by 1% annually while engagement was weak
- Earnings per share lagged its peers over the last three years as they only grew by 1.4% annually
At $9.34 per share, Cars.com trades at 4.4x forward EV/EBITDA. Read our free research report to see why you should think twice about including CARS in your portfolio.
Newmark (NMRK)
Market Cap: $2.63 billion
Founded in 1929, Newmark (NASDAQ: NMRK) provides commercial real estate services, including leasing advisory, global corporate services, investment sales and capital markets, property and facilities management, valuation and advisory, and consulting.
Why Do We Steer Clear of NMRK?
- Lackluster 12.5% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Cash-burning history makes us doubt the long-term viability of its business model
- Rising returns on capital show management is making relatively better investments
Newmark’s stock price of $14.81 implies a valuation ratio of 7.6x forward P/E. Check out our free in-depth research report to learn more about why NMRK doesn’t pass our bar.
Forestar Group (FOR)
Market Cap: $1.47 billion
As a majority-owned subsidiary of homebuilding giant D.R. Horton, Forestar Group (NYSE: FOR) develops and sells finished residential lots to homebuilders, focusing primarily on land acquisition and development for single-family homes.
Why Do We Pass on FOR?
- Sales trends were unexciting over the last five years as its 8.8% annual growth was below the typical consumer discretionary company
- Negative free cash flow raises questions about the return timeline for its investments
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Forestar Group is trading at $28.79 per share, or 9.9x forward P/E. Dive into our free research report to see why there are better opportunities than FOR.
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