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.
WideOpenWest (WOW)
Market Cap: $426.6 million
Initially started in Denver as a cable television provider, WideOpenWest (NYSE:WOW) provides high-speed internet, cable, and telephone services to the Midwest and Southeast regions of the U.S.
Why Do We Pass on WOW?
- Number of subscribers has disappointed over the past two years, indicating weak demand for its offerings
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
WideOpenWest’s stock price of $5.15 implies a valuation ratio of 1.6x forward EV-to-EBITDA. If you’re considering WOW for your portfolio, see our FREE research report to learn more.
Merit Medical Systems (MMSI)
Market Cap: $4.95 billion
Founded in 1987 and now offering over 1,700 patented products across global markets, Merit Medical Systems (NASDAQ:MMSI) manufactures and markets specialized medical devices used in minimally invasive procedures for cardiology, radiology, oncology, critical care, and endoscopy.
Why Are We Cautious About MMSI?
- Revenue base of $1.43 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $83.56 per share, Merit Medical Systems trades at 24.2x forward P/E. Check out our free in-depth research report to learn more about why MMSI doesn’t pass our bar.
Butterfield Bank (NTB)
Market Cap: $1.84 billion
Founded in 1784 as one of the oldest banks in the Western Hemisphere, Butterfield Bank (NYSE:NTB) provides banking, wealth management, and trust services to individuals and businesses in select offshore financial centers including Bermuda, Cayman Islands, and the Channel Islands.
Why Do We Think Twice About NTB?
- Muted 1.4% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Projected net interest income decline of 42.5% for the next 12 months points to a tough demand environment ahead
- Inferior net interest margin of 2.7% means it must compensate for lower profitability through increased loan originations
Butterfield Bank is trading at $44.82 per share, or 1.6x forward P/B. To fully understand why you should be careful with NTB, check out our full research report (it’s free).
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