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.

Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. That said, here is one Russell 2000 stock that could deliver strong gains and two best left off your watchlist.

Two Stocks to Sell:

BJ's (BJRI)

Market Cap: $865.8 million

Founded in 1978 in California, BJ’s Restaurants (NASDAQ: BJRI) is a chain of restaurants whose menu features classic American dishes, often with a twist.

Why Do We Think BJRI Will Underperform?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Gross margin of 14.3% reflects the bad unit economics inherent in most restaurant businesses
3. ROIC of 0.9% reflects management’s challenges in identifying attractive investment opportunities

BJ’s stock price of $39.15 implies a valuation ratio of 22.4x forward P/E. To fully understand why you should be careful with BJRI, check out our full research report (it’s free).

Pacific Premier Bancorp (PPBI)

Market Cap: $2.05 billion

With a specialized division that serves homeowners' associations nationwide and a trust division that handles self-directed IRAs with alternative assets, Pacific Premier Bancorp (NASDAQ: PPBI) is a Western US regional bank that provides banking services to small and middle-market businesses, corporations, non-profits, and specialty markets.

Why Are We Out on PPBI?

1. Loans are facing significant end-market challenges during this cycle as net interest income has declined by 4.8% annually over the last four years
2. Costs have risen faster than its revenue over the last four years, causing its efficiency ratio to worsen by 15.4 percentage points
3. Incremental sales over the last five years were much less profitable as its earnings per share fell by 9.1% annually while its revenue grew

At $21.22 per share, Pacific Premier Bancorp trades at 0.7x forward P/B. Dive into our free research report to see why there are better opportunities than PPBI.

One Stock to Buy:

1st Source (SRCE)

Market Cap: $1.52 billion

Tracing its roots back to 1863 during the Civil War era, 1st Source Corporation (NASDAQ: SRCE) is a regional bank holding company that provides commercial, consumer, specialty finance, and wealth management services across Indiana, Michigan, and Florida.

Why Is SRCE a Top Pick?

1. Net interest margin increased by 28.7 basis points (100 basis points = 1 percentage point) over the last two years, giving the company more capital to invest or return to shareholders
2. Earnings growth has massively outpaced its peers over the last two years as its EPS has compounded at 5.6% annually
3. Annual tangible book value per share growth of 8.3% over the last five years was superb and indicates its capital strength increased during this cycle

1st Source is trading at $61.99 per share, or 1.2x forward P/B. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.

High-Quality Stocks for All Market Conditions

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