3 Russell 2000 Stocks with Questionable Fundamentals

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 to steer clear of and some alternatives to watch instead.

Shutterstock (SSTK)

Market Cap: $782.4 million

Originally featuring a library that included many of founder Jon Oringer’s photos, Shutterstock (NYSE:SSTK) is now a digital platform where customers can license and use hundreds of millions of pieces of content.

Why Do We Think Twice About SSTK?

1. Preference for prioritizing user growth over monetization has led to 15.1% annual drops in its average revenue per request
2. Sales are projected to tank by 1.1% over the next 12 months as demand evaporates
3. Annual earnings per share growth of 2.5% underperformed its revenue over the last three years, partly because it diluted shareholders

Shutterstock’s stock price of $22.06 implies a valuation ratio of 3x forward EV/EBITDA. Check out our free in-depth research report to learn more about why SSTK doesn’t pass our bar.

SoundHound AI (SOUN)

Market Cap: $5.56 billion

Born from the idea that machines should understand human speech as naturally as people do, SoundHound AI (NASDAQ:SOUN) develops voice recognition and conversational intelligence technology that enables businesses to integrate voice assistants into their products and services.

Why Are We Cautious About SOUN?

1. Gross margin of 39.7% reflects its high servicing costs
2. Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
3. Cash burn makes us question whether it can achieve sustainable long-term growth

SoundHound AI is trading at $13.23 per share, or 25.6x forward price-to-sales. To fully understand why you should be careful with SOUN, check out our full research report (it’s free for active Edge members).

FirstSun Capital Bancorp (FSUN)

Market Cap: $894.9 million

Tracing its roots back to 1892 when it first opened its doors in Kansas, FirstSun Capital Bancorp (NASDAQ:FSUN) operates Sunflower Bank, providing commercial and consumer banking services to businesses and individuals across the Southwest region.

Why Is FSUN Not Exciting?

1. Annual revenue growth of 2.9% over the last two years was below our standards for the banking sector
2. Net interest margin dropped by 23.3 basis points (100 basis points = 1 percentage point) over the last two years, implying the firm’s loan book profitability fell as competitors entered the market
3. Tangible book value per share is projected to decrease by 2.9% over the next 12 months as capital generation weakens

At $32.08 per share, FirstSun Capital Bancorp trades at 0.8x forward P/B. Check out our free in-depth research report to learn more about why FSUN doesn’t pass our bar.

High-Quality Stocks for All Market Conditions

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