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. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
B&G Foods (BGS)
Market cap: $195.9 million
Started as a small grocery store in New York City, B&G Foods (NYSE:BGS) is an American packaged foods company with a diverse portfolio of more than 50 brands.
Why Do We Think BGS Will Underperform?
- Sales tumbled by 6% annually over the last three years, showing consumer trends are working against it
- Issuance of new shares over the last three years caused its earnings per share to fall by 20.4% annually, even worse than its revenue declines
- High net-debt-to-EBITDA ratio of 7× could force the company to raise capital on unfavorable terms if market conditions deteriorate
B&G Foods is trading at $2.43 per share, or 4.6x forward P/E. Read our free research report to see why you should think twice about including BGS in your portfolio.
Connection (CNXN)
Market cap: $2.19 billion
Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ:CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.
Why Are We Wary of CNXN?
- 2.6% annual revenue growth over the last five years was slower than its business services peers
- Adjusted operating margin didn’t move over the last five years, showing it couldn’t increase its efficiency
- Poor free cash flow margin of 2.9% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $86.78 per share, Connection trades at 18.2x forward P/E. Check out our free in-depth research report to learn more about why CNXN doesn’t pass our bar.
Essent Group (ESNT)
Market cap: $6.13 billion
Serving as a crucial bridge between homebuyers and the American dream of homeownership, Essent Group (NYSE:ESNT) provides private mortgage insurance and title services that enable lenders to offer home loans with down payments of less than 20%.
Why Are We Cautious About ESNT?
- Sluggish 1.8% annualized growth in net premiums earned over the last two years indicates the firm trailed its insurance peers
- Expenses have increased as a percentage of revenue over the last two years as its pre-tax profit margin fell by 9.8 percentage points
- Incremental sales over the last two years were less profitable as its 1.9% annual earnings per share growth lagged its revenue gains
Essent Group’s stock price of $68.24 implies a valuation ratio of 1x forward P/B. To fully understand why you should be careful with ESNT, check out our full research report (it’s free).
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