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. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Impinj (PI)
Market Cap: $5.32 billion
Founded by Caltech professor Carver Mead and one of his students Chris Diorio, Impinj (NASDAQ: PI) is a maker of radio-frequency identification (RFID) hardware and software.
Why Are We Wary of PI?
- Historical operating margin losses point to an inefficient cost structure
- Negative returns on capital show that some of its growth strategies have backfired
Impinj’s stock price of $179 implies a valuation ratio of 93.7x forward P/E. Read our free research report to see why you should think twice about including PI in your portfolio.
Cars.com (CARS)
Market Cap: $747.8 million
Originally started as a joint venture between several media companies including The Washington Post and The New York Times, Cars.com (NYSE: CARS) is a digital marketplace that connects new and used car buyers and sellers.
Why Are We Hesitant About CARS?
- Dealer Customers have stagnated over the last two years, indicating its platform may be struggling to differentiate itself from competitors
- Estimated sales growth of 2% for the next 12 months implies demand will slow from its three-year trend
- Earnings per share have dipped by 1.8% annually over the past three years, which is concerning because stock prices follow EPS over the long term
At $11.75 per share, Cars.com trades at 3.6x forward EV/EBITDA. To fully understand why you should be careful with CARS, check out our full research report (it’s free).
Alight (ALIT)
Market Cap: $1.70 billion
Born from a corporate spinoff in 2017 to focus on employee experience technology, Alight (NYSE: ALIT) provides human capital management solutions that help companies administer employee benefits, payroll, and workforce management systems.
Why Is ALIT Risky?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.5% annually over the last five years
- Earnings per share have contracted by 6% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Alight is trading at $3.17 per share, or 5.1x forward P/E. If you’re considering ALIT for your portfolio, see our FREE research report to learn more.
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