Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
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.
Rush Enterprises (RUSHA)
Market Cap: $5.48 billion
Headquartered in Texas, Rush Enterprises (NASDAQ: RUSH.A) provides truck-related services and solutions, including sales, leasing, parts, and maintenance for commercial vehicles.
Why Are We Cautious About RUSHA?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4% annually over the last two years
- Earnings per share have contracted by 8.5% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $71.28 per share, Rush Enterprises trades at 18.7x forward P/E. To fully understand why you should be careful with RUSHA, check out our full research report (it’s free).
Butterfield Bank (NTB)
Market Cap: $2.22 billion
Founded in 1784 as one of the oldest banks in the Western Hemisphere, Butterfield Bank (NYSE: NTB) provides banking, wealth management, and trust services to individuals and businesses in select offshore financial centers including Bermuda, Cayman Islands, and the Channel Islands.
Why Are We Wary of NTB?
- Net interest income trends were unexciting over the last five years as its 3.8% annual growth was below the typical banking firm
- Estimated net interest income growth of 1.1% for the next 12 months implies demand will slow from its five-year trend
- Net interest margin of 2.7% reflects its high servicing and capital costs
Butterfield Bank is trading at $56.21 per share, or 1.8x forward P/B. Read our free research report to see why you should think twice about including NTB in your portfolio.
Valaris (VAL)
Market Cap: $6.36 billion
Operating the world's largest fleet of offshore drilling rigs across six continents, Valaris (NYSE: VAL) provides offshore drilling rigs and crews to oil and gas companies exploring and producing in deep waters and shallow seas.
Why Does VAL Worry Us?
- Sales tumbled by 5% annually over the last ten years, showing market trends are working against its favor during this cycle
- Costly operations and weak unit economics result in an inferior gross margin of 21.1% that must be offset through higher production volumes
- Cash burn makes us question whether it can achieve sustainable long-term growth
Valaris’s stock price of $91.78 implies a valuation ratio of 18.3x forward P/E. If you’re considering VAL for your portfolio, see our FREE research report to learn more.
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