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.
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.
Pangaea (PANL)
Market Cap: $337.3 million
Established in 1996, Pangaea Logistics (NASDAQ: PANL) specializes in global logistics and transportation services, focusing on the shipment of dry bulk cargoes.
Why Is PANL Risky?
- Annual sales declines of 5.5% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have contracted by 33.9% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
- 9.1 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Pangaea is trading at $5 per share, or 9.4x forward P/E. To fully understand why you should be careful with PANL, check out our full research report (it’s free).
Richardson Electronics (RELL)
Market Cap: $147.3 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 Do We Steer Clear of RELL?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 12.3% annually over the last two years
- Earnings per share have dipped by 74.7% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Poor free cash flow margin of -0.4% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Richardson Electronics’s stock price of $10.39 implies a valuation ratio of 14.6x forward P/E. If you’re considering RELL for your portfolio, see our FREE research report to learn more.
Lake City Bank (LKFN)
Market Cap: $1.67 billion
Dating back to 1872 and deeply rooted in Indiana's communities, Lakeland Financial Corporation (NASDAQ: LKFN) operates Lake City Bank, providing commercial and consumer banking services throughout Northern and Central Indiana.
Why Do We Think Twice About LKFN?
- Net interest income trends were unexciting over the last four years as its 4.8% annual growth was below the typical bank company
- Net interest margin dropped by 21.3 basis points (100 basis points = 1 percentage point) over the last two years, implying the company’s spreads fell as competitors entered the market
- Annual tangible book value per share growth of 2.5% over the last five years was below our standards for the bank sector
At $64.87 per share, Lake City Bank trades at 2.2x forward P/B. Check out our free in-depth research report to learn more about why LKFN doesn’t pass our bar.
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