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.
SoundHound AI (SOUN)
Market Cap: $3.03 billion
Born from the idea that machines should understand human speech as naturally as people do, SoundHound AI (NASDAQ: SOUN) develops voice recognition and conversational intelligence technology that enables businesses to integrate voice assistants into their products and services.
Why Are We Wary of SOUN?
- Bad unit economics and steep infrastructure costs are reflected in its gross margin of 40.6%, one of the worst among software companies
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
- Cash burn makes us question whether it can achieve sustainable long-term growth
SoundHound AI’s stock price of $7.09 implies a valuation ratio of 11.7x forward price-to-sales. Read our free research report to see why you should think twice about including SOUN in your portfolio.
Ridgepost Capital (RPC)
Market Cap: $895.5 million
Operating as a bridge between institutional investors and hard-to-access private market opportunities, Ridgepost Capital (NYSE: RPC) is an alternative asset management firm that provides access to private equity, venture capital, impact investing, and private credit opportunities in the middle and lower middle markets.
Why Does RPC Worry Us?
- Incremental sales over the last two years were less profitable as its 6.3% annual earnings per share growth lagged its revenue gains
- Underwhelming 4.3% return on equity reflects management’s difficulties in finding profitable growth opportunities
Ridgepost Capital is trading at $8.18 per share, or 7.7x forward P/E. To fully understand why you should be careful with RPC, check out our full research report (it’s free).
Enova (ENVA)
Market Cap: $4.73 billion
Pioneering online lending since 2004 with a massive database of over 65 terabytes of customer behavior data, Enova International (NYSE: ENVA) provides online financial services including installment loans and lines of credit to non-prime consumers and small businesses in the United States and Brazil.
Why Does ENVA Give Us Pause?
- Performance over the past five years shows its incremental sales were less profitable, as its 8.5% annual earnings per share growth trailed its revenue gains
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $190.00 per share, Enova trades at 10.4x forward P/E. Dive into our free research report to see why there are better opportunities than ENVA.
Stocks We Like More
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