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 that don’t make the cut and some better choices instead.

Domo (DOMO)

Market Cap: $671.5 million

Founded by Josh James after selling his former business Omniture to Adobe, Domo (NASDAQ: DOMO) provides business intelligence software that allows managers to access and visualize critical business metrics in real-time, using their smartphones.

Why Should You Dump DOMO?

1. Customers had second thoughts about committing to its platform over the last year as its billings averaged 2.4% declines
2. Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Domo’s stock price of $16.87 implies a valuation ratio of 2.1x forward price-to-sales. Check out our free in-depth research report to learn more about why DOMO doesn’t pass our bar.

Malibu Boats (MBUU)

Market Cap: $638.5 million

Founded in California in 1982, Malibu Boats (NASDAQ: MBUU) is a manufacturer of high-performance sports boats and luxury watercrafts.

Why Do We Pass on MBUU?

1. Performance surrounding its boats sold has lagged its peers
2. Sales over the last five years were less profitable as its earnings per share fell by 17.4% annually while its revenue was flat
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

At $33.27 per share, Malibu Boats trades at 11.2x forward P/E. To fully understand why you should be careful with MBUU, check out our full research report (it’s free).

S&T Bancorp (STBA)

Market Cap: $1.39 billion

Tracing its roots back to 1902 in western Pennsylvania's industrial heartland, S&T Bancorp (NASDAQ: STBA) is a Pennsylvania-based bank holding company that provides retail and commercial banking services, cash management, trust services, and investment advisory solutions.

Why Does STBA Give Us Pause?

1. Muted 3.9% annual net interest income growth over the last five years shows its demand lagged behind its bank peers
2. Estimated net interest income growth of 5.1% for the next 12 months is soft and implies weaker demand
3. Net interest margin dropped by 35.7 basis points (100 basis points = 1 percentage point) over the last two years, implying the company’s spreads fell as competitors entered the market

S&T Bancorp is trading at $36.35 per share, or 0.9x forward P/B. Read our free research report to see why you should think twice about including STBA in your portfolio.

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