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.
Terex (TEX)
Market Cap: $3.61 billion
With humble beginnings as a dump truck company, Terex (NYSE: TEX) today manufactures lifting and material handling equipment designed to move and hoist heavy goods and materials.
Why Do We Think Twice About TEX?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Earnings per share fell by 19.3% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 3.7 percentage points
Terex’s stock price of $55 implies a valuation ratio of 9.9x forward P/E. If you’re considering TEX for your portfolio, see our FREE research report to learn more.
GATX (GATX)
Market Cap: $6.09 billion
Originally founded to ship beer, GATX (NYSE: GATX) provides leasing and management services for railcars and other transportation assets globally.
Why Does GATX Fall Short?
- Performance surrounding its active railcars has lagged its peers
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
GATX is trading at $170.80 per share, or 17.7x forward P/E. Dive into our free research report to see why there are better opportunities than GATX.
Horace Mann Educators (HMN)
Market Cap: $1.84 billion
Founded in 1945 and named after the 19th-century education reformer known as the "father of American public education," Horace Mann Educators (NYSE: HMN) is an insurance company that specializes in providing auto, property, life, and retirement products tailored for educators and other public service employees.
Why Should You Sell HMN?
- Sluggish 5.3% annualized growth in net premiums earned over the last five years indicates the firm trailed its insurance peers
- Policy losses and capital returns have eroded its book value per share this cycle as its book value per share declined by 3.2% annually over the last five years
- Underwhelming 6.7% return on equity reflects management’s difficulties in finding profitable growth opportunities
At $45.18 per share, Horace Mann Educators trades at 1.3x forward P/B. Check out our free in-depth research report to learn more about why HMN doesn’t pass our bar.
Stocks We Like More
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