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. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
eHealth (EHTH)
Market Cap: $121 million
Aiming to address a high-stakes and often confusing decision, eHealth (NASDAQ: EHTH) guides consumers through health insurance enrollment and related topics.
Why Are We Wary of EHTH?
- Estimated Membership have declined by 1.8% annually over the last two years, suggesting it may need to revamp its features or user experience to stay competitive
- Estimated sales decline of 3.4% for the next 12 months implies a challenging demand environment
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
eHealth’s stock price of $4.03 implies a valuation ratio of 2.6x forward EV/EBITDA. Dive into our free research report to see why there are better opportunities than EHTH.
Newmark (NMRK)
Market Cap: $2.45 billion
Founded in 1929, Newmark (NASDAQ: NMRK) provides commercial real estate services, including leasing advisory, global corporate services, investment sales and capital markets, property and facilities management, valuation and advisory, and consulting.
Why Do We Steer Clear of NMRK?
- Muted 4.9% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Cash-burning history makes us doubt the long-term viability of its business model
- ROIC of 3.1% reflects management’s challenges in identifying attractive investment opportunities
At $13.27 per share, Newmark trades at 9.3x forward P/E. If you’re considering NMRK for your portfolio, see our FREE research report to learn more.
Enact Holdings (ACT)
Market Cap: $5.32 billion
Playing a critical role in helping first-time homebuyers access the housing market, Enact Holdings (NASDAQ: ACT) provides private mortgage insurance that enables lenders to offer home loans with lower down payments while protecting against borrower defaults.
Why Should You Sell ACT?
- Flat net premiums earned over the last four years suggest it must find different ways to grow during this cycle
- Day-to-day expenses have swelled relative to revenue over the last two years as its combined ratio increased by 16.7 percentage points
- Incremental sales over the last two years were less profitable as its 2.4% annual earnings per share growth lagged its revenue gains
Enact Holdings is trading at $35.48 per share, or 1x forward P/B. To fully understand why you should be careful with ACT, check out our full research report (it’s free).
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