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 that don’t make the cut and some better choices instead.
Connection (CNXN)
Market Cap: $2.12 billion
Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ:CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.
Why Does CNXN Worry Us?
- Muted 2.3% annual revenue growth over the last five years shows its demand lagged behind its business services peers
- Earnings per share lagged its peers over the last two years as they only grew by 8.4% annually
- Low free cash flow margin of 2.7% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $84.14 per share, Connection trades at 20x forward P/E. Read our free research report to see why you should think twice about including CNXN in your portfolio.
Lake City Bank (LKFN)
Market Cap: $1.53 billion
Dating back to 1872 and deeply rooted in Indiana's communities, Lakeland Financial Corporation (NASDAQ:LKFN) operates Lake City Bank, providing commercial and consumer banking services throughout Northern and Central Indiana.
Why Do We Think Twice About LKFN?
- Muted 5% annual revenue growth over the last five years shows its demand lagged behind its banking peers
- Net interest income trends were unexciting over the last five years as its 5.8% annual growth was below the typical banking firm
- Incremental sales over the last five years were less profitable as its 3.3% annual earnings per share growth lagged its revenue gains
Lake City Bank’s stock price of $61.76 implies a valuation ratio of 1.9x forward P/B. To fully understand why you should be careful with LKFN, check out our full research report (it’s free).
Bank of Hawaii (BOH)
Market Cap: $3.13 billion
Founded in 1897 as a financial anchor for the newly annexed Hawaiian territory, Bank of Hawaii (NYSE:BOH) is a financial institution providing banking, investment, and insurance services primarily to customers in Hawaii, Guam, and other Pacific Islands.
Why Are We Wary of BOH?
- 3.8% annual net interest income growth over the last five years was slower than its banking peers
- Net interest margin of 2.5% is well below other banks, signaling its loans aren’t very profitable
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
Bank of Hawaii is trading at $79.28 per share, or 1.9x forward P/B. Dive into our free research report to see why there are better opportunities than BOH.
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