The Russell 2000 (^RUT) is packed with potential breakout stocks, thanks to its focus on smaller companies with high growth potential. However, smaller size also means these businesses often lack the resilience and financial flexibility of large-cap firms, making careful selection crucial.

Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here is one Russell 2000 stock that could be a breakout winner and two that may face some trouble.

Two Bank Stocks to Sell:

TowneBank (TOWN)

Market Cap: $2.73 billion

Founded in 1998 with a commitment to community-centered banking in the Hampton Roads region, TowneBank (NASDAQ: TOWN) is a community-focused financial institution providing banking, lending, and wealth management services to individuals and businesses in Virginia and North Carolina.

Why Do We Think Twice About TOWN?

1. 4.2% annual net interest income growth over the last four years was slower than its banking peers
2. Net interest margin of 3% is well below other banks, signaling its loans aren’t very profitable
3. Day-to-day expenses have swelled relative to revenue over the last four years as its efficiency ratio increased by 13.6 percentage points

TowneBank is trading at $36 per share, or 1.2x forward P/B. To fully understand why you should be careful with TOWN, check out our full research report (it’s free).

Two Harbors Investment (TWO)

Market Cap: $1.02 billion

Operating in the complex world of mortgage finance since 2009, Two Harbors Investment (NYSE: TWO) is a real estate investment trust that invests in mortgage servicing rights and agency residential mortgage-backed securities.

Why Are We Out on TWO?

1. Customers borrowered less money this cycle as its net interest income declined by 47.1% annually over the last five years
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 20.2% annually
3. Loan losses and capital returns have eroded its tangible book value per share this cycle as its tangible book value per share declined by 14.6% annually over the last five years

Two Harbors Investment’s stock price of $9.85 implies a valuation ratio of 0.7x forward P/B. Dive into our free research report to see why there are better opportunities than TWO.

One Bank Stock to Watch:

PennyMac Financial Services (PFSI)

Market Cap: $5.66 billion

Founded during the 2008 financial crisis to help address the mortgage market meltdown, PennyMac Financial Services (NYSE: PFSI) is a specialty financial services company that originates, services, and manages investments related to residential mortgage loans in the United States.

Why Are We Positive On PFSI?

1. Annual net interest income growth of 39.9% over the past five years was outstanding, reflecting market share gains this cycle
2. Performance over the past two years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 66.2% outpaced its revenue gains
3. Balance sheet strength has increased this cycle as its 18.8% annual tangible book value per share growth over the last five years was exceptional

At $110.42 per share, PennyMac Financial Services trades at 1.3x forward P/B. Is now a good time to buy? Find out in our full research report, it’s free.

High-Quality Stocks for All Market Conditions

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