Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.

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.

Integra LifeSciences (IART)

Market Cap: $1.07 billion

Founded in 1989 as a pioneer in regenerative medicine technology, Integra LifeSciences (NASDAQ: IART) develops and manufactures medical technologies for neurosurgery, wound care, and surgical reconstruction, including regenerative tissue products and surgical instruments.

Why Do We Pass on IART?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 7.7 percentage points
3. 21 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

Integra LifeSciences’s stock price of $13.68 implies a valuation ratio of 5.6x forward P/E. Check out our free in-depth research report to learn more about why IART doesn’t pass our bar.

ICU Medical (ICUI)

Market Cap: $3.01 billion

Founded in 1984 and named for its initial focus on intensive care units, ICU Medical (NASDAQ: ICUI) develops and manufactures medical products for infusion therapy, vascular access, and vital care applications used in hospitals and other healthcare settings.

Why Are We Out on ICUI?

1. Muted 1.3% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
2. Projected sales decline of 11% for the next 12 months points to a tough demand environment ahead
3. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 19.1% annually

At $121.35 per share, ICU Medical trades at 16.5x forward P/E. To fully understand why you should be careful with ICUI, check out our full research report (it’s free).

Essent Group (ESNT)

Market Cap: $6.12 billion

Serving as a crucial bridge between homebuyers and the American dream of homeownership, Essent Group (NYSE: ESNT) provides private mortgage insurance and title services that enable lenders to offer home loans with down payments of less than 20%.

Why Are We Hesitant About ESNT?

1. Growth in insurance policies was lackluster over the last five years as its 3.6% annual growth underperformed the typical financial institution
2. Day-to-day expenses have swelled relative to revenue over the last two years as its pre-tax profit margin fell by 12.5 percentage points
3. Incremental sales over the last two years were less profitable as its 4.9% annual earnings per share growth lagged its revenue gains

Essent Group is trading at $62.07 per share, or 1x forward P/B. Dive into our free research report to see why there are better opportunities than ESNT.

Stocks We Like More

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