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 steer clear of and some alternatives to watch instead.
The Marzetti Company (MZTI)
Market Cap: $4.73 billion
Known for its frozen garlic bread and Parkerhouse rolls, The Marzetti Company (NASDAQ: MZTI) sells bread, dressing, and dips to the retail and food service channels.
Why Does MZTI Worry Us?
- Muted 4% annual revenue growth over the last three years shows its demand lagged behind its consumer staples peers
- Estimated sales growth of 1.8% for the next 12 months implies demand will slow from its three-year trend
- Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 23.4% that must be offset through higher volumes
The Marzetti Company is trading at $172.14 per share, or 24.1x forward P/E. Dive into our free research report to see why there are better opportunities than MZTI.
BrightSpring Health Services (BTSG)
Market Cap: $6.76 billion
Founded in 1974, BrightSpring Health Services (NASDAQ: BTSG) offers home health care, hospice, neuro-rehabilitation, and pharmacy services.
Why Are We Hesitant About BTSG?
- Earnings per share have dipped by 46% annually over the past four years, which is concerning because stock prices follow EPS over the long term
- Investment activity picked up over the last five years, pressuring its weak free cash flow margin of 1.3%
- ROIC of 3.9% reflects management’s challenges in identifying attractive investment opportunities
At $32.60 per share, BrightSpring Health Services trades at 26.7x forward P/E. Check out our free in-depth research report to learn more about why BTSG doesn’t pass our bar.
Westamerica Bancorporation (WABC)
Market Cap: $1.19 billion
Founded in 1884 and serving communities from Mendocino County in the north to Kern County in the south, Westamerica Bancorporation (NASDAQ: WABC) provides banking services to individuals and small businesses throughout Northern and Central California.
Why Are We Cautious About WABC?
- 6.2% annual net interest income growth over the last five years was slower than its banking peers
- Estimated net interest income decline of 11% for the next 12 months implies a challenging demand environment
- Net interest margin shrank by 46.7 basis points (100 basis points = 1 percentage point) over the last two years, suggesting the profitability of its loan book is decreasing or the market is becoming more competitive
Westamerica Bancorporation’s stock price of $47.20 implies a valuation ratio of 1.3x forward P/B. Read our free research report to see why you should think twice about including WABC in your portfolio.
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