The Russell 2000 (^RUT) is packed with potential breakout stocks, thanks to its focus on smaller companies with high growth potential. However, smaller size also means these businesses often lack the resilience and financial flexibility of large-cap firms, making careful selection crucial.
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 that don’t make the cut and some better choices instead.
Red Rock Resorts (RRR)
Market Cap: $3.49 billion
Founded in 1976, Red Rock Resorts (NASDAQ: RRR) operates a range of casino resorts and entertainment properties, primarily in the Las Vegas metropolitan area.
Why Do We Avoid RRR?
- Annual revenue growth of 11.2% over the last five years was below our standards for the consumer discretionary sector
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 2 percentage points over the next year
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Red Rock Resorts is trading at $59.85 per share, or 20x forward P/E. Read our free research report to see why you should think twice about including RRR in your portfolio.
Newmark (NMRK)
Market Cap: $2.70 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 Pass on NMRK?
- Sales trends were unexciting over the last five years as its 11.6% annual growth was below the typical consumer discretionary company
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Improving returns on capital suggest management is identifying more profitable investments
At $14.66 per share, Newmark trades at 7.7x forward P/E. To fully understand why you should be careful with NMRK, check out our full research report (it’s free).
Columbia Financial (CLBK)
Market Cap: $1.82 billion
Founded during the Roaring Twenties in 1926 and headquartered in Fair Lawn, New Jersey, Columbia Financial (NASDAQ: CLBK) operates federally chartered savings banks in New Jersey that offer traditional banking services including loans, deposits, and insurance products.
Why Should You Sell CLBK?
- Flat net interest income over the last five years suggest it must find different ways to grow during this cycle
- Inferior net interest margin of 2.1% means it must compensate for lower profitability through increased loan originations
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 1.9% annually while its revenue grew
Columbia Financial’s stock price of $17.48 implies a valuation ratio of 1.4x forward P/B. If you’re considering CLBK for your portfolio, see our FREE research report to learn more.
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