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.
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. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
La-Z-Boy (LZB)
Market Cap: $1.61 billion
The prized possession of every mancave, La-Z-Boy (NYSE: LZB) is a furniture company specializing in recliners, sofas, and seats.
Why Should You Sell LZB?
- Lackluster 5.8% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Forecasted free cash flow margin suggests the company will fail to improve its cash conversion over the next year
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
La-Z-Boy is trading at $39.08 per share, or 13.3x forward P/E. Check out our free in-depth research report to learn more about why LZB doesn’t pass our bar.
Westamerica Bancorporation (WABC)
Market Cap: $1.22 billion
Founded in 1884 and serving communities from Mendocino County in the north to Kern County in the south, Westamerica Bancorporation (NASDAQ: WABC) provides banking services to individuals and small businesses throughout Northern and Central California.
Why Are We Wary of WABC?
- 6.8% annual net interest income growth over the last five years was slower than its banking peers
- Net interest margin dropped by 46.7 basis points (100 basis points = 1 percentage point) over the last two years, implying the firm’s loan book profitability fell as competitors entered the market
- Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
Westamerica Bancorporation’s stock price of $49.03 implies a valuation ratio of 1.3x forward P/B. If you’re considering WABC for your portfolio, see our FREE research report to learn more.
First Interstate BancSystem (FIBK)
Market Cap: $3.86 billion
Tracing its roots back to 1971 and still guided by founding family principles, First Interstate BancSystem (NASDAQ: FIBK) operates a network of community banks across 14 western and midwestern states, offering comprehensive banking services to individuals, businesses, and government entities.
Why Do We Avoid FIBK?
- Annual sales declines of 4.3% for the past two years show its products and services struggled to connect with the market during this cycle
- Estimated net interest income decline of 1.4% for the next 12 months implies a challenging demand environment
- Earnings per share fell by 1.9% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
At $37.11 per share, First Interstate BancSystem trades at 1.1x forward P/B. To fully understand why you should be careful with FIBK, check out our full research report (it’s free).
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