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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Chegg (CHGG)
Market Cap: $129 million
Started as a physical textbook rental service, Chegg (NYSE: CHGG) is now a digital platform addressing student pain points by providing study and academic assistance.
Why Should You Sell CHGG?
- Intense competition is diverting traffic from its platform as its services subscribers fell by 13.4% annually
- Inability to adjust its cost structure while its revenue declined over the last few years led to a 13.1 percentage point drop in the company’s EBITDA margin
- Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable
Chegg is trading at $1.22 per share, or 2x forward EV/EBITDA. Check out our free in-depth research report to learn more about why CHGG doesn’t pass our bar.
iHeartMedia (IHRT)
Market Cap: $246.4 million
Occasionally featuring celebrity hosts like Ryan Seacrest on its shows, iHeartMedia (NASDAQ: IHRT) is a leading multimedia company renowned for its extensive network of radio stations, digital platforms, and live events across the globe.
Why Should You Dump IHRT?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $1.70 per share, iHeartMedia trades at 0.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including IHRT in your portfolio.
eXp World (EXPI)
Market Cap: $1.42 billion
Founded in 2009, eXp World (NASDAQ: EXPI) is a real estate company known for its virtual, cloud-based approach to real estate brokerage.
Why Are We Out on EXPI?
- Number of transactions has disappointed over the past two years, indicating weak demand for its offerings
- Subpar operating margin of -0.3% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 49.7% annually while its revenue grew
eXp World’s stock price of $9.30 implies a valuation ratio of 20.9x forward P/E. To fully understand why you should be careful with EXPI, check out our full research report (it’s free).
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