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 that don’t make the cut and some better choices instead.
Sonos (SONO)
Market Cap: $1.72 billion
A pioneer in connected home audio systems, Sonos (NASDAQ: SONO) offers a range of premium wireless speakers and sound systems.
Why Do We Pass on SONO?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Low free cash flow margin of 4.5% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Sonos’s stock price of $14.33 implies a valuation ratio of 1.2x forward price-to-sales. To fully understand why you should be careful with SONO, check out our full research report (it’s free).
agilon health (AGL)
Market Cap: $248.2 million
Transforming how doctors care for seniors by shifting financial incentives from volume to outcomes, agilon health (NYSE: AGL) provides a platform that helps primary care physicians transition to value-based care models for Medicare patients through long-term partnerships and global capitation arrangements.
Why Are We Hesitant About AGL?
- Sales are projected to tank by 8% over the next 12 months as demand evaporates
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 3.6 percentage points
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
agilon health is trading at $0.58 per share, or 0.1x forward price-to-sales. Dive into our free research report to see why there are better opportunities than AGL.
Home Bancshares (HOMB)
Market Cap: $5.30 billion
Founded in Conway, Arkansas in 1998 and growing through strategic acquisitions across the Southeast, Home Bancshares (NYSE: HOMB) operates as the bank holding company for Centennial Bank, providing commercial and retail banking services to businesses and individuals across multiple states.
Why Is HOMB Not Exciting?
- Muted 4.4% annual revenue growth over the last two years shows its demand lagged behind its banking peers
- Demand will likely fall over the next 12 months as Wall Street expects flat net interest income
- Performance over the past five years shows its incremental sales were less profitable, as its 6.2% annual earnings per share growth trailed its revenue gains
At $26.96 per share, Home Bancshares trades at 1.2x forward P/B. Read our free research report to see why you should think twice about including HOMB in your portfolio.
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