Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
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.
Funko (FNKO)
Market Cap: $290.9 million
Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ: FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.
Why Do We Avoid FNKO?
- 5.4% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Poor free cash flow margin of 2.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Funko is trading at $5.15 per share, or 206.4x forward P/E. Read our free research report to see why you should think twice about including FNKO in your portfolio.
OFG Bancorp (OFG)
Market Cap: $1.90 billion
Originally founded in 1964 as a federal savings and loan institution, OFG Bancorp (NYSE: OFG) provides banking and financial services including commercial and consumer lending, wealth management, insurance, and trust services primarily in Puerto Rico and the U.S. Virgin Islands.
Why Are We Wary of OFG?
- 8.8% annual net interest income growth over the last five years was slower than its banking peers
- Estimated net interest income decline of 2.2% for the next 12 months implies a challenging demand environment
- 55.7 basis point (100 basis points = 1 percentage point) decline in its net interest margin over the last two years reflects the firm’s willingness to accept lower profitability to defend its market position
OFG Bancorp’s stock price of $45.03 implies a valuation ratio of 1.3x forward P/B. Dive into our free research report to see why there are better opportunities than OFG.
Green Plains (GPRE)
Market Cap: $1.08 billion
Operating one of North America's largest ethanol platforms with capacity to process 310 million bushels of corn annually, Green Plains (NASDAQ: GPRE) operates ten biorefineries that convert corn into ethanol for fuel, distillers grains for animal feed, and renewable corn oil.
Why Do We Think GPRE Will Underperform?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Gross margin of 5.5% is below its competitors, leaving less money to invest in exploration and production
- Negative free cash flow raises questions about the return timeline for its investments
At $15.34 per share, Green Plains trades at 9.1x forward P/E. Check out our free in-depth research report to learn more about why GPRE doesn’t pass our bar.
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