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 avoid and better alternatives to consider.
Steven Madden (SHOO)
Market Cap: $2.11 billion
As seen in the infamous Wolf of Wall Street movie, Steven Madden (NASDAQ:SHOO) is a fashion brand famous for its trendy and innovative footwear, appealing to a young and style-conscious audience.
Why Are We Wary of SHOO?
- Sales trends were unexciting over the last two years as its 9.4% annual growth was below the typical consumer discretionary company
- Low free cash flow margin of 7.9% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Waning returns on capital imply its previous profit engines are losing steam
At $29.15 per share, Steven Madden trades at 17.6x forward P/E. Check out our free in-depth research report to learn more about why SHOO doesn’t pass our bar.
Enterprise Financial Services (EFSC)
Market Cap: $2.27 billion
Starting as a single bank in Missouri in 1988 and expanding through strategic growth, Enterprise Financial Services (NASDAQ:EFSC) is a financial holding company that offers banking, lending, and wealth management services to businesses and individuals across seven states.
Why Does EFSC Give Us Pause?
- Estimated net interest income growth of 4.2% for the next 12 months implies demand will slow from its five-year trend
- 25.7 basis point (100 basis points = 1 percentage point) decline in its net interest margin over the last two years reflects the firm’s willingness to accept lower profitability to defend its market position
- Efficiency ratio is expected to worsen by 1.1 percentage points over the next year
Enterprise Financial Services’s stock price of $61.24 implies a valuation ratio of 1.2x forward P/B. If you’re considering EFSC for your portfolio, see our FREE research report to learn more.
Encore Capital Group (ECPG)
Market Cap: $962.8 million
Operating in the often misunderstood world of debt collection since 1999, Encore Capital Group (NASDAQ:ECPG) purchases portfolios of defaulted consumer debt at deep discounts and works with individuals to recover these obligations while helping them toward financial recovery.
Why Are We Hesitant About ECPG?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Sales over the last five years were less profitable as its earnings per share fell by 27.6% annually while its revenue was flat
- High net-debt-to-EBITDA ratio could force the company to raise capital at unfavorable terms if market conditions deteriorate
Encore Capital Group is trading at $41.84 per share, or 6.7x forward P/E. To fully understand why you should be careful with ECPG, check out our full research report (it’s free).
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