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.
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. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
C3.ai (AI)
Market Cap: $2.5 billion
Founded in 2009 by enterprise software veteran Tom Seibel, C3.ai (NYSE: AI) provides software that makes it easy for organizations to add artificial intelligence technology to their applications.
Why Should You Sell AI?
- Annual revenue growth of 15.5% over the last three years was below our standards for the software sector
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
- Persistent operating margin losses suggest the business manages its expenses poorly
C3.ai is trading at $18.56 per share, or 5.9x forward price-to-sales. Dive into our free research report to see why there are better opportunities than AI.
Standex (SXI)
Market Cap: $2.51 billion
Holding over 500 patents globally, Standex (NYSE: SXI) is a manufacturer and distributor of industrial components for various sectors.
Why Are We Wary of SXI?
- Annual revenue growth of 3.3% over the last two years was below our standards for the industrials sector
- Earnings per share lagged its peers over the last two years as they only grew by 7.8% annually
- Free cash flow margin dropped by 4.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $208.12 per share, Standex trades at 24.4x forward P/E. Check out our free in-depth research report to learn more about why SXI doesn’t pass our bar.
First Merchants (FRME)
Market Cap: $2.28 billion
Dating back to 1893 when it first opened its doors in Indiana, First Merchants (NASDAQ: FRME) is a Midwest regional bank providing commercial, consumer, and wealth management services through branches in Indiana, Ohio, Michigan, and Illinois.
Why Does FRME Fall Short?
- Annual sales declines of 1.8% for the past two years show its products and services struggled to connect with the market during this cycle
- Net interest income trends were unexciting over the last five years as its 7.1% annual growth was below the typical banking firm
- Net interest margin shrank by 27.3 basis points (100 basis points = 1 percentage point) over the last two years, suggesting the profitability of its loan book is decreasing or the market is becoming more competitive
First Merchants’s stock price of $39.48 implies a valuation ratio of 0.9x forward P/B. If you’re considering FRME for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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