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 avoid and better alternatives to consider.
Amplitude (AMPL)
Market Cap: $1.40 billion
Born from the realization that companies were flying blind when it came to understanding user behavior in their digital products, Amplitude (NASDAQ: AMPL) provides a digital analytics platform that helps businesses understand how people use their digital products to improve user experiences and drive revenue growth.
Why Do We Avoid AMPL?
- Average ARR growth of 13.8% over the last year has disappointed, suggesting it’s had a hard time winning long-term deals and renewals
- Net revenue retention rate of 101% trails the industry benchmark of 110%+ and shows it has a tough time increasing customer spending
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 2.2 percentage points
At $10.48 per share, Amplitude trades at 3.5x forward price-to-sales. Dive into our free research report to see why there are better opportunities than AMPL.
Funko (FNKO)
Market Cap: $241.4 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 Are We Out on FNKO?
- Lackluster 7.7% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Funko’s stock price of $4.42 implies a valuation ratio of 5.3x forward EV-to-EBITDA. To fully understand why you should be careful with FNKO, check out our full research report (it’s free).
Trustmark (TRMK)
Market Cap: $2.55 billion
Tracing its roots back to 1889 in Mississippi, Trustmark (NASDAQ: TRMK) is a financial services organization providing banking, wealth management, insurance, and mortgage services across five southeastern states.
Why Does TRMK Fall Short?
- 8.6% annual net interest income growth over the last five years was slower than its banking peers
- Efficiency ratio is expected to worsen by 1.7 percentage points over the next year
- Low return on equity reflects management’s struggle to allocate funds effectively
Trustmark is trading at $42.55 per share, or 1.2x forward P/B. Check out our free in-depth research report to learn more about why TRMK doesn’t pass our bar.
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