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. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Petco (WOOF)
Market Cap: $831 million
Historically known for its window displays of pets for sale or adoption, Petco (NASDAQ: WOOF) is a specialty retailer of pet food and supplies as well as a provider of services such as wellness checks and grooming.
Why Should You Sell WOOF?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Issuance of new shares over the last three years caused its earnings per share to fall by 34.5% annually
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $2.90 per share, Petco trades at 11.9x forward P/E. Check out our free in-depth research report to learn more about why WOOF doesn’t pass our bar.
PennyMac Mortgage Investment Trust (PMT)
Market Cap: $823.2 million
Operating as a real estate investment trust since 2009 to maintain tax advantages, PennyMac Mortgage Investment Trust (NYSE: PMT) is a specialty finance company that invests in mortgage-related assets and operates a correspondent lending business.
Why Do We Pass on PMT?
- Sales tumbled by 14.3% annually over the last five years, showing market trends are working against it during this cycle
- Earnings per share have contracted by 12.1% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Loan losses and capital returns have eroded its tangible book value per share this cycle as its tangible book value per share declined by 6.3% annually over the last five years
PennyMac Mortgage Investment Trust’s stock price of $9.56 implies a valuation ratio of 0.6x forward P/B. To fully understand why you should be careful with PMT, check out our full research report (it’s free).
World Kinect (WKC)
Market Cap: $2.00 billion
Serving over 150,000 customers from commercial jets to cargo ships to heating oil consumers, World Kinect (NYSE: WKC) procures and delivers fuel and energy products to airlines, shipping companies, trucking fleets, and industrial businesses worldwide.
Why Is WKC Risky?
- Gross margin of 2.3% reflects its high production costs and unfavorable asset base
- Low free cash flow margin of 0.3% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
World Kinect is trading at $39.06 per share, or 14.4x forward P/E. Read our free research report to see why you should think twice about including WKC in your portfolio.
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