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.
Trinity (TRN)
Market Cap: $2.44 billion
Operating under the trade name TrinityRail, Trinity (NYSE: TRN) is a provider of railcar products and services in North America.
Why Does TRN Worry Us?
- Demand cratered as it couldn’t win new orders over the past two years, leading to an average 27.8% decline in its backlog
- Projected sales for the next 12 months are flat and suggest demand will be subdued
- Free cash flow margin shrank by 22.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Trinity is trading at $30.73 per share, or 1.1x trailing 12-month price-to-sales. Check out our free in-depth research report to learn more about why TRN doesn’t pass our bar.
ePlus (PLUS)
Market Cap: $1.99 billion
Starting as a financing company in 1990 before evolving into a full-service technology provider, ePlus (NASDAQ: PLUS) provides comprehensive IT solutions, professional services, and financing options to help organizations optimize their technology infrastructure and supply chain processes.
Why Does PLUS Give Us Pause?
- Sales trends were unexciting over the last two years as its 4.4% annual growth was below the typical business services company
- Incremental sales over the last two years were less profitable as its earnings per share were flat while its revenue grew
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
ePlus’s stock price of $75.95 implies a valuation ratio of 14.3x forward P/E. Dive into our free research report to see why there are better opportunities than PLUS.
BancFirst (BANF)
Market Cap: $3.59 billion
Operating as a "super community bank" with a decentralized management approach that emphasizes local responsiveness, BancFirst Corporation (NASDAQ: BANF) operates as a financial holding company providing commercial banking services to retail customers and small to medium-sized businesses primarily in Oklahoma and Texas.
Why Does BANF Fall Short?
- Net interest income trends were unexciting over the last five years as its 9.8% annual growth was below the typical banking firm
- Projected 2.1 percentage point efficiency ratio increase over the next year signals its day-to-day expenses will rise
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 6% annually
At $107.10 per share, BancFirst trades at 1.7x forward P/B. To fully understand why you should be careful with BANF, check out our full research report (it’s free).
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