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. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
Bally's (BALY)
Market Cap: $686.4 million
Headquartered in Providence, Rhode Island, Bally's Corporation (NYSE:BALY) is a diversified global casino-entertainment company that owns and manages casinos, resorts, and online gaming platforms.
Why Are We Out on BALY?
- Annual revenue growth of 6.9% over the last two years was below our standards for the consumer discretionary sector
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $13.64 per share, Bally's trades at 13.6x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than BALY.
Hilton Grand Vacations (HGV)
Market Cap: $2.70 billion
Spun off from Hilton Worldwide in 2017, Hilton Grand Vacations (NYSE:HGV) is a global timeshare company that provides travel experiences for its customers through its timeshare resorts and club membership programs.
Why Do We Think HGV Will Underperform?
- Performance surrounding its members has lagged its peers
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Hilton Grand Vacations is trading at $34.70 per share, or 7.1x forward P/E. If you’re considering HGV for your portfolio, see our FREE research report to learn more.
Northwest Bancshares (NWBI)
Market Cap: $2.15 billion
Founded in 1896 and operating across Pennsylvania, New York, Ohio, and Indiana, Northwest Bancshares (NASDAQ:NWBI) is a bank holding company that operates Northwest Bank, providing personal and business banking, investment management, and trust services.
Why Does NWBI Worry Us?
- Annual net interest income growth of 7.1% over the last five years was below our standards for the banking sector
- Performance over the past five years shows its incremental sales were less profitable, as its 2.8% annual earnings per share growth trailed its revenue gains
- Muted 1.4% annual tangible book value per share growth over the last five years shows its capital generation lagged behind its banking peers
Northwest Bancshares’s stock price of $14.66 implies a valuation ratio of 1.1x forward P/B. Read our free research report to see why you should think twice about including NWBI in your portfolio.
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