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. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
Victoria's Secret (VSCO)
Market Cap: $4.35 billion
Spun off from L Brands in 2020, Victoria’s Secret (NYSE: VSCO) is an intimate clothing and beauty retailer that sells its own brands of lingerie, undergarments, and personal fragrances.
Why Is VSCO Risky?
- Products fail to spark excitement with consumers, as seen in its flat sales over the last three years
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
At $54 per share, Victoria's Secret trades at 19.9x forward P/E. If you’re considering VSCO for your portfolio, see our FREE research report to learn more.
Triumph Financial (TFIN)
Market Cap: $1.49 billion
Originally focused on traditional banking before pivoting to serve the transportation sector, Triumph Financial (NASDAQ: TFIN) provides specialized financial services to the trucking industry, including payments processing, factoring, banking, and data intelligence solutions.
Why Should You Sell TFIN?
- Net interest income trends were unexciting over the last five years as its 5.4% annual growth was below the typical banking firm
- Net interest margin dropped by 130.7 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
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 22.1% annually while its revenue grew
Triumph Financial’s stock price of $62.63 implies a valuation ratio of 1.7x forward P/B. Check out our free in-depth research report to learn more about why TFIN doesn’t pass our bar.
Ellington Financial (EFC)
Market Cap: $1.46 billion
Operating under the guidance of Ellington Management Group, a respected name in structured credit markets, Ellington Financial (NYSE: EFC) acquires and manages a diverse portfolio of mortgage-related, consumer-related, and other financial assets to generate returns for investors.
Why Are We Out on EFC?
- Incremental sales over the last five years were less profitable as its 1.6% annual earnings per share growth lagged its revenue gains
- Loan losses and capital returns have eroded its tangible book value per share this cycle as its tangible book value per share declined by 4% annually over the last five years
- Low return on equity reflects management’s struggle to allocate funds effectively
Ellington Financial is trading at $13.74 per share, or 1x forward P/B. Dive into our free research report to see why there are better opportunities than EFC.
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