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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
LGI Homes (LGIH)
Market Cap: $1.21 billion
Based in Texas, LGI Homes (NASDAQ: LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.
Why Do We Steer Clear of LGIH?
- Backlog failed to grow over the past two years, suggesting the company may need to tweak its product roadmap and go-to-market strategy
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $51.56 per share, LGI Homes trades at 6.7x forward P/E. Check out our free in-depth research report to learn more about why LGIH doesn’t pass our bar.
Corcept (CORT)
Market Cap: $7.76 billion
Focusing on the powerful stress hormone that affects everything from metabolism to immune function, Corcept Therapeutics (NASDAQ: CORT) develops and markets medications that modulate cortisol to treat endocrine disorders, cancer, and neurological diseases.
Why Are We Wary of CORT?
- Smaller revenue base of $685.4 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 16.2 percentage points
- 16.1 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Corcept is trading at $74.80 per share, or 36.2x forward P/E. Read our free research report to see why you should think twice about including CORT in your portfolio.
Community Bank (CBU)
Market Cap: $3.02 billion
Tracing its roots back to 1866 in upstate New York, Community Financial System (NYSE: CBU) is a financial holding company that provides banking, employee benefits, wealth management, and insurance services to retail, commercial, and municipal customers.
Why Are We Hesitant About CBU?
- Net interest income trends were unexciting over the last four years as its 5.6% annual growth was below the typical bank company
- Net interest margin of 3.1% is well below other banks, signaling its loans aren’t very profitable
- Annual tangible book value per share declines of 4.3% for the past five years show its capital management struggled during this cycle
Community Bank’s stock price of $57.11 implies a valuation ratio of 1.6x forward P/B. Dive into our free research report to see why there are better opportunities than CBU.
Stocks We Like More
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