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 avoid and better alternatives to consider.

MGP Ingredients (MGPI)

Market Cap: $525.7 million

Headquartered in Atchison, Kansas, MGP Ingredients (NASDAQ: MGPI) is a leading supplier of high-quality ingredients to the food and beverage industry

Why Should You Dump MGPI?

1. Products aren't resonating with the market as its revenue declined by 6% annually over the last three years
2. Projected sales decline of 15.8% over the next 12 months indicates demand will continue deteriorating
3. Operating margin declined by 13.6 percentage points over the last year as its sales cratered

MGP Ingredients is trading at $24.38 per share, or 9.4x forward P/E. Check out our free in-depth research report to learn more about why MGPI doesn’t pass our bar.

The Pennant Group (PNTG)

Market Cap: $883.7 million

Spun off from The Ensign Group in 2019 to focus on non-skilled nursing healthcare services, Pennant Group (NASDAQ: PNTG) operates home health, hospice, and senior living facilities across 13 western and midwestern states, serving patients of all ages including seniors.

Why Does PNTG Give Us Pause?

1. Modest revenue base of $798.9 million gives it less fixed cost leverage and fewer distribution channels than larger companies
2. Poor free cash flow margin of 1.2% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Low returns on capital reflect management’s struggle to allocate funds effectively

At $26.08 per share, The Pennant Group trades at 21.7x forward P/E. Dive into our free research report to see why there are better opportunities than PNTG.

Renasant (RNST)

Market Cap: $3.46 billion

Founded in 1904 during a time when the South was rebuilding its economy, Renasant (NYSE: RNST) is a regional bank holding company that offers banking, wealth management, insurance, and specialized lending services throughout the Southeast.

Why Are We Hesitant About RNST?

1. Net interest margin of 3.4% is well below other banks, signaling its loans aren’t very profitable
2. Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 8.6% annually
3. 4.2% annual tangible book value per share growth over the last two years was slower than its banking peers

Renasant’s stock price of $36.44 implies a valuation ratio of 0.9x forward P/B. To fully understand why you should be careful with RNST, check out our full research report (it’s free).

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