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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Universal Technical Institute (UTI)
Market Cap: $1.61 billion
Founded in 1965, Universal Technical Institute (NYSE: UTI) is a leading provider of technical training programs, specializing in automotive, diesel, collision repair, motorcycle, and marine technicians.
Why Do We Pass on UTI?
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.6 percentage points
- Underwhelming 11.5% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Universal Technical Institute is trading at $29.65 per share, or 14.3x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than UTI.
Sanmina (SANM)
Market Cap: $9.29 billion
Founded in 1980, Sanmina (NASDAQ: SANM) is an electronics manufacturing services company offering end-to-end solutions for various industries.
Why Does SANM Fall Short?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.6% annually over the last two years
- High input costs result in an inferior gross margin of 8.3% that must be offset through higher volumes
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
At $176.89 per share, Sanmina trades at 20.9x forward P/E. Read our free research report to see why you should think twice about including SANM in your portfolio.
Flagstar Financial (FLG)
Market Cap: $4.56 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 Should You Dump FLG?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 23.8% annually over the last two years
- Net interest margin of 1.9% is well below other banks, signaling its loans aren’t very profitable
- Earnings per share fell by 18.3% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
Flagstar Financial’s stock price of $10.96 implies a valuation ratio of 0.7x forward P/B. Check out our free in-depth research report to learn more about why FLG doesn’t pass our bar.
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