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 steer clear of and some alternatives to watch instead.
Smith & Wesson (SWBI)
Market Cap: $659.4 million
With a history dating back to 1852, Smith & Wesson (NASDAQ: SWBI) is a firearms manufacturer known for its handguns and rifles.
Why Should You Sell SWBI?
- Products and services aren't resonating with the market as its revenue declined by 12.2% annually over the last five years
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Smith & Wesson is trading at $14.82 per share, or 46.4x forward P/E. Read our free research report to see why you should think twice about including SWBI in your portfolio.
Resideo (REZI)
Market Cap: $6.02 billion
Resideo Technologies, Inc. (NYSE: REZI) is a manufacturer and distributor of technology-driven products and solutions for home comfort, energy management, water management, and safety and security.
Why Is REZI Not Exciting?
- Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
- Free cash flow margin dropped by 21.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Waning returns on capital imply its previous profit engines are losing steam
At $39.75 per share, Resideo trades at 12.8x forward P/E. To fully understand why you should be careful with REZI, check out our full research report (it’s free).
United Community Banks (UCB)
Market Cap: $4.00 billion
Starting as a small community bank in 1950 and expanding through strategic acquisitions across the Southeast, United Community Banks (NYSE: UCB) is a regional bank holding company that provides financial services including loans, deposits, wealth management, and merchant services across the southeastern United States.
Why Are We Hesitant About UCB?
- Annual revenue growth of 6% over the last two years was below our standards for the banking sector
- Net interest income is projected to tank by 5.2% over the next 12 months as demand evaporates
- Performance over the past five years shows its incremental sales were less profitable, as its 6.7% annual earnings per share growth trailed its revenue gains
United Community Banks’s stock price of $33.39 implies a valuation ratio of 1.1x forward P/B. Check out our free in-depth research report to learn more about why UCB doesn’t pass our bar.
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