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.
El Pollo Loco (LOCO)
Market Cap: $327.6 million
With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ:LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.
Why Do We Steer Clear of LOCO?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Subscale operations are evident in its revenue base of $476 million, meaning it has fewer distribution channels than its larger rivals
- Estimated sales growth of 4% for the next 12 months is soft and implies weaker demand
El Pollo Loco’s stock price of $10.96 implies a valuation ratio of 5.1x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than LOCO.
Sphere Entertainment (SPHR)
Market Cap: $1.43 billion
Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE:SPHR) hosts live entertainment events and distributes content across various media platforms.
Why Should You Dump SPHR?
- Sales trends were unexciting over the last five years as its 2.4% annual growth was below the typical consumer discretionary company
- Negative free cash flow raises questions about the return timeline for its investments
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Sphere Entertainment is trading at $40.25 per share, or 7.9x forward EV-to-EBITDA. If you’re considering SPHR for your portfolio, see our FREE research report to learn more.
ServisFirst Bancshares (SFBS)
Market Cap: $4.09 billion
Founded in 2005 with a focus on serving underserved mid-sized businesses, ServisFirst Bancshares (NYSE:SFBS) is a bank holding company that provides commercial banking services to businesses and professionals through its subsidiary ServisFirst Bank.
Why Do We Think Twice About SFBS?
- 7.3% annual net interest income growth over the last four years was slower than its bank peers
- 50 basis point (100 basis points = 1 percentage point) decline in its net interest margin over the last two years reflects the company’s willingness to accept lower yields to defend its market position
- High debt servicing costs relative to its earnings leave little margin for error in meeting its financial obligations
At $74.84 per share, ServisFirst Bancshares trades at 2.2x forward P/B. Read our free research report to see why you should think twice about including SFBS in your portfolio.
Stocks We Like More
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