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.
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 steer clear of and some alternatives to watch instead.
PacBio (PACB)
Market Cap: $459.7 million
Pioneering what scientists call "HiFi long-read sequencing," recognized as Nature Methods' method of the year for 2022, Pacific Biosciences (NASDAQ: PACB) develops advanced DNA sequencing systems that enable scientists and researchers to analyze genomes with unprecedented accuracy and completeness.
Why Does PACB Fall Short?
- Annual sales declines of 10.6% for the past two years show its products and services struggled to connect with the market during this cycle
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
At $1.46 per share, PacBio trades at 2.5x forward price-to-sales. Check out our free in-depth research report to learn more about why PACB doesn’t pass our bar.
Ellington Financial (EFC)
Market Cap: $1.69 billion
Operating under the guidance of Ellington Management Group, a respected name in structured credit markets, Ellington Financial (NYSE: EFC) acquires and manages a diverse portfolio of mortgage-related, consumer-related, and other financial assets to generate returns for investors.
Why Do We Think EFC Will Underperform?
- Performance over the past five years shows its incremental sales were less profitable, as its 4.8% annual earnings per share growth trailed its revenue gains
- Annual tangible book value per share declines of 5.7% for the past five years show its capital management struggled during this cycle
- ROE of 6.9% reflects management’s challenges in identifying attractive investment opportunities
Ellington Financial is trading at $13.55 per share, or 1x forward P/B. Read our free research report to see why you should think twice about including EFC in your portfolio.
TETRA Technologies (TTI)
Market Cap: $1.11 billion
Operating across six continents with approximately 40,000 acres of mineral-rich brine leases in Arkansas, TETRA Technologies (NYSE: TTI) provides well completion fluids and water management services to oil and gas operators.
Why Do We Avoid TTI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.7% annually over the last ten years
- Revenue base of $630 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Gross margin of 29.1% is below its competitors, leaving less money to invest in exploration and production
TETRA Technologies’s stock price of $7.80 implies a valuation ratio of 28.1x forward P/E. If you’re considering TTI for your portfolio, see our FREE research report to learn more.
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+271% between June 2020 and June 2025). Find your next big winner with StockStory today.
