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 steer clear of and some alternatives to watch instead.

Dine Brands (DIN)

Market Cap: $408.8 million

Operating a franchise model, Dine Brands (NYSE: DIN) is a casual restaurant chain that owns the Applebee’s and IHOP banners.

Why Do We Avoid DIN?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
2. Efficiency has decreased over the last year as its operating margin fell by 4.6 percentage points
3. High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens

At $25.61 per share, Dine Brands trades at 6.1x forward P/E. To fully understand why you should be careful with DIN, check out our full research report (it’s free for active Edge members).

Werner (WERN)

Market Cap: $1.69 billion

Conducting business in over a 100 countries, Werner (NASDAQ: WERN) offers full-truckload, less-than-truckload, and intermodal delivery services.

Why Are We Out on WERN?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.7% annually over the last two years
2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 37.2% annually while its revenue grew
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Werner’s stock price of $26.82 implies a valuation ratio of 39.5x forward P/E. Dive into our free research report to see why there are better opportunities than WERN.

Republic Bancorp (RBCAA)

Market Cap: $1.38 billion

With roots dating back to 1974 and operating across multiple states including Kentucky, Indiana, Florida, Ohio, and Tennessee, Republic Bancorp (NASDAQGS:RBCA.A) is a Kentucky-based financial holding company that operates a bank offering traditional banking, mortgage services, and specialized financial products.

Why Do We Think Twice About RBCAA?

1. Net interest income is projected to remain flat over the next 12 months as demand decelerates from its five-year trend
2. Efficiency ratio is forecasted to remain flat over the next year, suggesting its fixed cost leverage is currently maxed out
3. Capital trends were unexciting over the last two years as its 10% annual tangible book value per share growth was below the typical banking firm

Republic Bancorp is trading at $69.66 per share, or 1.3x forward P/B. If you’re considering RBCAA for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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