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 that don’t make the cut and some better choices instead.

Xponential Fitness (XPOF)

Market Cap: $301.4 million

Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE: XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.

Why Are We Cautious About XPOF?

1. Sales trends were unexciting over the last two years as its 9.3% annual growth was below the typical consumer discretionary company
2. Operating margin of 0.1% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
3. Negative returns on capital show management lost money while trying to expand the business

At $8.63 per share, Xponential Fitness trades at 7.7x forward P/E. Check out our free in-depth research report to learn more about why XPOF doesn’t pass our bar.

Hyster-Yale Materials Handling (HY)

Market Cap: $744.8 million

Playing a significant role in the development of the hydraulic lift truck, Hyster-Yale (NYSE: HY) designs, manufactures, and sells materials handling equipment to various sectors.

Why Is HY Not Exciting?

1. Annual revenue growth of 5.1% over the last five years was below our standards for the industrials sector
2. Sales are projected to tank by 5.1% over the next 12 months as demand evaporates
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.5% for the last five years

Hyster-Yale Materials Handling is trading at $42.06 per share, or 4.7x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including HY in your portfolio.

Insperity (NSP)

Market Cap: $2.67 billion

Pioneering the professional employer organization (PEO) industry it helped establish, Insperity (NYSE: NSP) provides human resources outsourcing services to small and medium-sized businesses, handling payroll, benefits, compliance, and HR administration.

Why Does NSP Worry Us?

1. 4.1% annual revenue growth over the last two years was slower than its business services peers
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 5.7% annually
3. Free cash flow margin dropped by 5.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Insperity’s stock price of $70.97 implies a valuation ratio of 19.2x forward P/E. To fully understand why you should be careful with NSP, check out our full research report (it’s free).

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