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.
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. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Gray Television (GTN)
Market Cap: $520.8 million
Specializing in local media coverage, Gray Television (NYSE: GTN) is a broadcast company supplying digital media to various markets in the United States.
Why Do We Avoid GTN?
- 9.1% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $4.95 per share, Gray Television trades at 7x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than GTN.
Golden Entertainment (GDEN)
Market Cap: $698.8 million
Founded in 2001, Golden Entertainment (NASDAQ: GDEN) is a gaming company operating casinos, taverns, and distributed gaming platforms.
Why Do We Pass on GDEN?
- Products and services have few die-hard fans as sales have declined by 2.5% annually over the last five years
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Golden Entertainment is trading at $26.71 per share, or 51.9x forward P/E. To fully understand why you should be careful with GDEN, check out our full research report (it’s free for active Edge members).
FirstCash (FCFS)
Market Cap: $7.16 billion
Offering a financial lifeline to the unbanked and credit-constrained since 1988, FirstCash (NASDAQ: FCFS) operates pawn stores across the U.S. and Latin America while also providing retail point-of-sale payment solutions for credit-constrained consumers.
Why Does FCFS Give Us Pause?
- Sales trends were unexciting over the last two years as its 6.9% annual growth was below the typical financials company
- Products and services are facing significant credit quality challenges during this cycle as tangible book value per share has declined by 159% annually over the last five years
FirstCash’s stock price of $161.53 implies a valuation ratio of 16.7x forward P/E. If you’re considering FCFS for your portfolio, see our FREE research report to learn more.
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