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. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Upstart (UPST)
Market Cap: $7.24 billion
Founded by the former head of Google's enterprise business, Upstart (NASDAQ: UPST) is an AI-powered lending platform facilitating loans for banks and consumers.
Why Are We Wary of UPST?
- Sales tumbled by 11.4% annually over the last three years, showing industry trends like AI are working against its favor
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
- High net-debt-to-EBITDA ratio of 8× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $76 per share, Upstart trades at 6.7x forward price-to-sales. Read our free research report to see why you should think twice about including UPST in your portfolio.
Trinity (TRN)
Market Cap: $2.33 billion
Operating under the trade name TrinityRail, Trinity (NYSE: TRN) is a provider of railcar products and services in North America.
Why Are We Cautious About TRN?
- Sales tumbled by 1.1% annually over the last five years, showing market trends are working against its favor during this cycle
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Trinity is trading at $28.54 per share, or 4.4x forward EV-to-EBITDA. To fully understand why you should be careful with TRN, check out our full research report (it’s free).
NeoGenomics (NEO)
Market Cap: $958.8 million
Operating a network of CAP-accredited and CLIA-certified laboratories across the United States and United Kingdom, NeoGenomics (NASDAQ: NEO) provides specialized cancer diagnostic testing services, including genetic analysis, molecular testing, and pathology consultation for oncologists and healthcare providers.
Why Is NEO Risky?
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 12% annually
- Negative returns on capital show that some of its growth strategies have backfired, and its falling returns suggest its earlier profit pools are drying up
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
NeoGenomics’s stock price of $7.45 implies a valuation ratio of 33.3x forward P/E. Read our free research report to see why you should think twice about including NEO in your portfolio.
Stocks We Like More
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