The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.
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.
Gorman-Rupp (GRC)
Market Cap: $985 million
Powering fluid dynamics since 1934, Gorman-Rupp (NYSE:GRC) has evolved from its Ohio origins into a global manufacturer and seller of pumps and pump systems.
Why Does GRC Give Us Pause?
- Sales trends were unexciting over the last two years as its 7.1% annual growth was below the typical industrials company
- Estimated sales growth of 3.8% for the next 12 months implies demand will slow from its two-year trend
- Free cash flow margin shrank by 4.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Gorman-Rupp’s stock price of $37.46 implies a valuation ratio of 17.4x forward P/E. Dive into our free research report to see why there are better opportunities than GRC.
ABM (ABM)
Market Cap: $3.01 billion
With roots dating back to 1909 as a window washing company, ABM Industries (NYSE:ABM) provides integrated facility management, infrastructure, and mobility solutions across various sectors including commercial, manufacturing, education, and aviation.
Why Are We Out on ABM?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Incremental sales over the last two years were less profitable as its earnings per share were flat while its revenue grew
- Free cash flow margin dropped by 8.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
ABM is trading at $48.42 per share, or 12.5x forward P/E. Check out our free in-depth research report to learn more about why ABM doesn’t pass our bar.
The Bancorp (TBBK)
Market Cap: $3.22 billion
Operating behind the scenes of many popular fintech apps and prepaid cards you might use daily, The Bancorp (NASDAQ:TBBK) is a bank holding company that specializes in providing banking services to fintech companies and offering specialty lending products.
Why Are We Cautious About TBBK?
- Estimated net interest income growth of 4.6% for the next 12 months implies demand will slow from its four-year trend
- Annual interest expenses are high relative to its profits, increasing the probability of its failure to meet certain borrowing obligations
At $69.69 per share, The Bancorp trades at 3.5x forward P/B. To fully understand why you should be careful with TBBK, check out our full research report (it’s free).
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