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 that don’t make the cut and some better choices instead.
Kulicke and Soffa (KLIC)
Market cap: $3.79 billion
Headquartered in Singapore, Kulicke & Soffa (NASDAQ: KLIC) is a provider of production equipment and tools used to assemble semiconductor devices
Why Should You Sell KLIC?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.7% annually over the last five years
- Operating profits fell over the last five years as its sales dropped and it struggled to adjust its fixed costs
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 18.1 percentage points
Kulicke and Soffa’s stock price of $72.49 implies a valuation ratio of 12.2x forward P/E. Read our free research report to see why you should think twice about including KLIC in your portfolio.
First Watch (FWRG)
Market cap: $841.1 million
Based on a nautical reference to the first work shift aboard a ship, First Watch (NASDAQ: FWRG) is a chain of breakfast and brunch restaurants whose menu is heavily-focused on eggs and griddle items such as pancakes.
Why Do We Think Twice About FWRG?
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- ROIC of 4.6% reflects management’s challenges in identifying attractive investment opportunities
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
At $13.72 per share, First Watch trades at 56.6x forward P/E. Check out our free in-depth research report to learn more about why FWRG doesn’t pass our bar.
Simmons First National (SFNC)
Market cap: $3.40 billion
With roots dating back to 1903 and a presence across Arkansas, Kansas, Missouri, Oklahoma, Tennessee, and Texas, Simmons First National (NASDAQ: SFNC) is a regional bank holding company that provides banking and financial services to individuals and businesses.
Why Are We Bearish on SFNC?
- 6.1% annual net interest income growth over the last five years was slower than its banking peers
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 4.5% annually while its revenue grew
- Tangible book value per share tumbled by 4.9% annually over the last five years, showing banking sector trends are working against it during this cycle
Simmons First National is trading at $23.52 per share, or 1x forward P/B. If you’re considering SFNC for your portfolio, see our FREE research report to learn more.
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