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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Boise Cascade (BCC)
Market Cap: $2.75 billion
Formed through the merger of two lumber companies, Boise Cascade Company (NYSE: BCC) manufactures and distributes wood products and other building materials.
Why Is BCC Risky?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.3% annually over the last two years
- Free cash flow margin shrank by 6.8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Boise Cascade is trading at $74.26 per share, or 20.8x forward P/E. To fully understand why you should be careful with BCC, check out our full research report (it’s free for active Edge members).
Sphere Entertainment (SPHR)
Market Cap: $3.37 billion
Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE: SPHR) hosts live entertainment events and distributes content across various media platforms.
Why Do We Pass on SPHR?
- Lackluster 8.5% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Poor free cash flow margin of 1.9% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Returns on capital are increasing as management makes relatively better investment decisions
At $96.00 per share, Sphere Entertainment trades at 14x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why SPHR doesn’t pass our bar.
Enterprise Financial Services (EFSC)
Market Cap: $2.07 billion
Starting as a single bank in Missouri in 1988 and expanding through strategic growth, Enterprise Financial Services (NASDAQ: EFSC) is a financial holding company that offers banking, lending, and wealth management services to businesses and individuals across seven states.
Why Are We Cautious About EFSC?
- 4.9% annual revenue growth over the last two years was slower than its banking peers
- Net interest margin dropped by 31.3 basis points (100 basis points = 1 percentage point) over the last two years, implying the firm’s loan book profitability fell as competitors entered the market
- Earnings per share fell by 2.8% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
Enterprise Financial Services’s stock price of $56 implies a valuation ratio of 1.1x forward P/B. Read our free research report to see why you should think twice about including EFSC in your portfolio.
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