Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
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.
Covista (CVSA)
Market Cap: $4.18 billion
Formerly known as DeVry Education Group, Covista (NYSE: CVSA) is a global provider of workforce solutions and educational services.
Why Should You Sell CVSA?
- Muted 15.2% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Projected 3.8 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- Underwhelming 9% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $122.93 per share, Covista trades at 15.1x forward P/E. Check out our free in-depth research report to learn more about why CVSA doesn’t pass our bar.
German American Bancorp (GABC)
Market Cap: $1.56 billion
Founded in 1910 during a wave of community banking expansion in the Midwest, German American Bancorp (NASDAQ: GABC) is a financial holding company that provides banking, wealth management, and insurance services across southern Indiana and Kentucky.
Why Do We Think Twice About GABC?
- Efficiency ratio is projected to stay flat over the coming year, suggesting its fixed cost leverage is currently maxed out
- Performance over the past two years shows its incremental sales were less profitable, as its 2% annual earnings per share growth trailed its revenue gains
- Annual tangible book value per share growth of 1.5% over the last five years was below our standards for the banking sector
German American Bancorp’s stock price of $41.62 implies a valuation ratio of 1.3x forward P/B. To fully understand why you should be careful with GABC, check out our full research report (it’s free).
Peabody Energy (BTU)
Market Cap: $2.90 billion
Beginning with a single wagon hauling coal in Illinois back when Grover Cleveland was president, Peabody Energy (NYSE: BTU) mines coal used by electricity generators and steel manufacturers.
Why Do We Steer Clear of BTU?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.7% annually over the last ten years
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 24.9%
- Efficiency has decreased over the last five years as its EBITDA margin fell by 25.1 percentage points
Peabody Energy is trading at $23.75 per share, or 3.9x forward EV-to-EBITDA. If you’re considering BTU for your portfolio, see our FREE research report to learn more.
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