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 to avoid and better alternatives to consider.
Monro (MNRO)
Market Cap: $378.3 million
Started as a single location in Rochester, New York, Monro (NASDAQ: MNRO) provides common auto services such as brake repairs, tire replacements, and oil changes.
Why Should You Sell MNRO?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital on unfavorable terms if market conditions deteriorate
Monro’s stock price of $12.09 implies a valuation ratio of 50.5x forward P/E. Check out our free in-depth research report to learn more about why MNRO doesn’t pass our bar.
UFP Technologies (UFPT)
Market Cap: $2.14 billion
With expertise dating back to 1963 in specialized materials and precision manufacturing, UFP Technologies (NASDAQ: UFPT) designs and manufactures custom solutions for medical devices, sterile packaging, and other highly engineered products for healthcare and industrial applications.
Why Does UFPT Fall Short?
- Revenue base of $631.6 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Adjusted operating margin didn’t move over the last two years, showing it couldn’t increase its efficiency
At $288.27 per share, UFP Technologies trades at 25.4x forward P/E. Dive into our free research report to see why there are better opportunities than UFPT.
First Busey (BUSE)
Market Cap: $2.50 billion
Tracing its roots back to 1868 during America's post-Civil War reconstruction era, First Busey (NASDAQ: BUSE) is a bank holding company that provides commercial and retail banking, wealth management, and payment technology solutions across Illinois, Missouri, Florida, and Indiana.
Why Are We Wary of BUSE?
- Net interest margin of 3.5% is well below other banks, signaling its loans aren’t very profitable
- Incremental sales over the last five years were less profitable as its 1.6% annual earnings per share growth lagged its revenue gains
- Forecasted tangible book value per share decline of 4.8% for the upcoming 12 months implies profitability will deteriorate significantly
First Busey is trading at $30.79 per share, or 1.1x forward P/B. Read our free research report to see why you should think twice about including BUSE in your portfolio.
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