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. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Richardson Electronics (RELL)
Market Cap: $156.8 million
Founded in 1947, Richardson Electronics (NASDAQ: RELL) is a distributor of power grid and microwave tubes as well as consumables related to those products.
Why Should You Dump RELL?
- Backlog has dropped by 2% on average over the past two years, suggesting it’s losing orders as competition picks up
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.4% for the last five years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Richardson Electronics is trading at $10.61 per share, or 60.2x forward P/E. Dive into our free research report to see why there are better opportunities than RELL.
Ameresco (AMRC)
Market Cap: $2.19 billion
Having played a role in upgrading the energy solutions of Alcatraz Island, Ameresco (NYSE: AMRC) provides energy and renewable energy solutions for various sectors.
Why Is AMRC Not Exciting?
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 16.5%
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Ameresco’s stock price of $40.99 implies a valuation ratio of 46x forward P/E. To fully understand why you should be careful with AMRC, check out our full research report (it’s free for active Edge members).
Banc of California (BANC)
Market Cap: $2.67 billion
Originally established in 1941 and now operating with a tech-forward approach that includes its SmartStreet platform for homeowner associations, Banc of California (NYSE: BANC) is a California-based bank holding company that provides banking services to small and middle-market businesses, entrepreneurs, and individuals.
Why Does BANC Fall Short?
- Loans are facing end-market challenges during this cycle, as seen in its flat net interest income over the last five years
- Costs have risen faster than its revenue over the last five years, causing its efficiency ratio to worsen by 20.5 percentage points
- Annual tangible book value per share declines of 3.6% for the past five years show its capital management struggled during this cycle
At $17.20 per share, Banc of California trades at 0.9x forward P/B. Read our free research report to see why you should think twice about including BANC in your portfolio.
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