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.
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.
Commvault (CVLT)
Market Cap: $4.37 billion
Born from the need to create ironclad protection in an increasingly dangerous digital world, Commvault (NASDAQ: CVLT) provides data protection and cyber resilience software that helps organizations secure, back up, and recover their data across on-premises, hybrid, and multi-cloud environments.
Why Are We Hesitant About CVLT?
- Sales trends were unexciting over the last five years as its 10.3% annual growth was below the typical software company
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
- Operating margin dropped by 1.2 percentage points over the last year as the company focused on expansion rather than profitability
Commvault is trading at $105.98 per share, or 3.5x forward price-to-sales. Check out our free in-depth research report to learn more about why CVLT doesn’t pass our bar.
Meritage Homes (MTH)
Market Cap: $4.26 billion
Originally founded in 1985 in Arizona as Monterey Homes, Meritage Homes (NYSE: MTH) is a homebuilder specializing in designing and constructing energy-efficient and single-family homes in the US.
Why Should You Sell MTH?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.8% annually over the last two years
- Earnings per share have contracted by 2.2% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $63.95 per share, Meritage Homes trades at 12.1x forward P/E. Read our free research report to see why you should think twice about including MTH in your portfolio.
Community Bank (CBU)
Market Cap: $3.32 billion
Tracing its roots back to 1866 in upstate New York, Community Financial System (NYSE: CBU) is a financial holding company that provides banking, employee benefits, wealth management, and insurance services to retail, commercial, and municipal customers.
Why Is CBU Not Exciting?
- Net interest income trends were unexciting over the last five years as its 7% annual growth was below the typical banking firm
- Annual earnings per share growth of 4.1% underperformed its revenue over the last five years, showing its incremental sales were less profitable
- Tangible book value per share stagnated over the last five years, limiting its ability to leverage its balance sheet to make additional investments
Community Bank’s stock price of $63.17 implies a valuation ratio of 1.5x forward P/B. Dive into our free research report to see why there are better opportunities than CBU.
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