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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
Dave & Buster's (PLAY)
Market Cap: $361.5 million
Founded by a former game parlor and bar operator, Dave & Buster’s (NASDAQ:PLAY) operates a chain of arcades providing immersive entertainment experiences.
Why Do We Avoid PLAY?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Dave & Buster’s stock price of $10.44 implies a valuation ratio of 8.2x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including PLAY in your portfolio.
Surgery Partners (SGRY)
Market Cap: $2.02 billion
With more than 180 locations across 33 states serving as alternatives to traditional hospital settings, Surgery Partners (NASDAQ:SGRY) operates a national network of outpatient surgical facilities including ambulatory surgery centers and short-stay surgical hospitals.
Why Is SGRY Not Exciting?
- Disappointing unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Estimated sales growth of 3.3% for the next 12 months implies demand will slow from its two-year trend
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $15.58 per share, Surgery Partners trades at 30.8x forward P/E. Dive into our free research report to see why there are better opportunities than SGRY.
Flagstar Financial (FLG)
Market Cap: $5.83 billion
Tracing its roots back to 1859 and rebranded from New York Community Bancorp in 2024, Flagstar Financial (NYSE:FLG) is a bank holding company that offers commercial and consumer banking services, with specialties in multi-family lending, mortgage originations, and warehouse lending.
Why Do We Pass on FLG?
- 7.5% annual net interest income growth over the last five years was slower than its banking peers
- Inferior net interest margin of 2% means it must compensate for lower profitability through increased loan originations
- Earnings per share fell by 52.6% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
Flagstar Financial is trading at $13.95 per share, or 0.7x forward P/B. To fully understand why you should be careful with FLG, check out our full research report (it’s free).
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