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.
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.
Market Cap: $519.5 million
Powering communications for tech giants like Microsoft, Google, and Zoom, Bandwidth (NASDAQ:BAND) provides cloud-based communications software and APIs that enable businesses to embed voice, messaging, and emergency services into their applications and platforms.
Why Does BAND Worry Us?
12% annual revenue growth over the last two years was slower than its software peers
Sky-high servicing costs result in an inferior gross margin of 39.1% that must be offset through increased usage
Operating margin was unchanged over the last year, suggesting it failed to gain leverage on its fixed costs
Bandwidth is trading at $16.56 per share, or 0.6x forward price-to-sales. To fully understand why you should be careful with BAND, check out our full research report (it’s free).
Market Cap: $1.49 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 Do We Think Twice About STBA?
Muted 7% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
Forecasted net interest income decline of 5.3% for the upcoming 12 months implies demand will fall off a cliff
Sales over the last two years were less profitable as its earnings per share fell by 3.3% annually while its revenue was flat
At $40.71 per share, S&T Bancorp trades at 1x forward P/B. Dive into our free research report to see why there are better opportunities than STBA.
Market Cap: $1.02 billion
Tracing its roots back to 1892 when it first opened its doors in Kansas, FirstSun Capital Bancorp (NASDAQ:FSUN) operates Sunflower Bank, providing commercial and consumer banking services to businesses and individuals across the Southwest region.
Why Does FSUN Give Us Pause?
Sales trends were unexciting over the last two years as its 5.5% annual growth was below the typical banking company
Net interest margin dropped by 22 basis points (100 basis points = 1 percentage point) over the last two years, implying the firm’s loan book profitability fell as competitors entered the market
Forecasted tangible book value per share decline of 3.3% for the upcoming 12 months implies profitability will deteriorate significantly
