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.
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 steer clear of and some alternatives to watch instead.
El Pollo Loco (LOCO)
Market Cap: $293.4 million
With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ: LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.
Why Do We Think LOCO Will Underperform?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Modest revenue base of $479.7 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Anticipated sales growth of 4.7% for the next year implies demand will be shaky
El Pollo Loco is trading at $9.93 per share, or 11.3x forward P/E. Read our free research report to see why you should think twice about including LOCO in your portfolio.
UFP Industries (UFPI)
Market Cap: $5.39 billion
Beginning as a lumber supplier in the 1950s, UFP Industries (NASDAQ: UFPI) is a holding company making building materials for the construction, retail, and industrial sectors.
Why Are We Hesitant About UFPI?
- Declining unit sales over the past two years imply it may need to invest in improvements to get back on track
- Earnings per share have dipped by 20.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Waning returns on capital imply its previous profit engines are losing steam
UFP Industries’s stock price of $94.07 implies a valuation ratio of 14.3x forward P/E. If you’re considering UFPI for your portfolio, see our FREE research report to learn more.
Home Bancshares (HOMB)
Market Cap: $5.60 billion
Founded in Conway, Arkansas in 1998 and growing through strategic acquisitions across the Southeast, Home Bancshares (NYSE: HOMB) operates as the bank holding company for Centennial Bank, providing commercial and retail banking services to businesses and individuals across multiple states.
Why Are We Wary of HOMB?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Estimated net interest income growth of 2.3% for the next 12 months implies demand will slow from its five-year trend
- Efficiency ratio is forecasted to remain flat over the next year, suggesting its fixed cost leverage is currently maxed out
At $28.39 per share, Home Bancshares trades at 1.3x forward P/B. Dive into our free research report to see why there are better opportunities than HOMB.
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