The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.

Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.

Installed Building Products (IBP)

Market Cap: $7.40 billion

Founded in 1977, Installed Building Products (NYSE: IBP) is a company specializing in the installation of insulation, waterproofing, and other complementary building products for residential and commercial construction.

Why Are We Cautious About IBP?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Forecasted revenue decline of 3.1% for the upcoming 12 months implies demand will fall off a cliff
3. Earnings per share lagged its peers over the last two years as they only grew by 5.3% annually

Installed Building Products is trading at $272.55 per share, or 27.3x forward P/E. If you’re considering IBP for your portfolio, see our FREE research report to learn more.

PacBio (PACB)

Market Cap: $384.5 million

Pioneering what scientists call "HiFi long-read sequencing," recognized as Nature Methods' method of the year for 2022, Pacific Biosciences (NASDAQ: PACB) develops advanced DNA sequencing systems that enable scientists and researchers to analyze genomes with unprecedented accuracy and completeness.

Why Is PACB Risky?

1. 3.4% annual revenue growth over the last two years was slower than its healthcare peers
2. 28.2 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
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

PacBio’s stock price of $1.28 implies a valuation ratio of 2.3x forward price-to-sales. Check out our free in-depth research report to learn more about why PACB doesn’t pass our bar.

Veritex Holdings (VBTX)

Market Cap: $1.77 billion

Founded during the 2009 financial crisis when many banks were failing, Veritex Holdings (NASDAQGM:VBTX) operates Veritex Community Bank, providing commercial and retail banking services to small and medium-sized businesses and professionals in Texas.

Why Does VBTX Fall Short?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.1% annually over the last two years
2. Estimated net interest income growth of 2.6% for the next 12 months implies demand will slow from its four-year trend
3. Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 12.8% annually, worse than its revenue

At $32.29 per share, Veritex Holdings trades at 1x forward P/B. Read our free research report to see why you should think twice about including VBTX in your portfolio.

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