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 is one Russell 2000 stock that could deliver strong gains and two best left off your watchlist.

Two Industrials Stocks to Sell:

Allient (ALNT)

Market Cap: $754.5 million

Founded in 1962, Allient (NASDAQ: ALNT) develops and manufactures precision and specialty-controlled motion components and systems.

Why Does ALNT Worry Us?

1. Sales tumbled by 3.5% annually over the last two years, showing market trends are working against its favor during this cycle
2. Earnings per share decreased by more than its revenue over the last two years, partly because it diluted shareholders
3. Underwhelming 8% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam

Allient’s stock price of $44.30 implies a valuation ratio of 21.5x forward P/E. Read our free research report to see why you should think twice about including ALNT in your portfolio.

Proto Labs (PRLB)

Market Cap: $1.2 billion

Pioneering the concept of online quoting and manufacturing for custom prototypes and low-volume production parts, Proto Labs (NYSE: PRLB) offers injection molding, 3D printing, and sheet metal fabrication for manufacturers in various industries.

Why Is PRLB Risky?

1. 2.4% annual revenue growth over the last two years was slower than its industrials peers
2. Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 7.6 percentage points
3. Earnings per share have contracted by 9.3% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance

Proto Labs is trading at $50.08 per share, or 32.8x forward P/E. Dive into our free research report to see why there are better opportunities than PRLB.

One Industrials Stock to Buy:

Federal Signal (FSS)

Market Cap: $7.35 billion

Developing sirens that warned of air raid attacks or fallout during the Cold War, Federal Signal (NYSE: FSS) provides safety and emergency equipment for government agencies, municipalities, and industrial companies.

Why Are We Bullish on FSS?

1. Operating margin expanded by 4.4 percentage points over the last five years as it scaled and became more efficient
2. Performance over the past two years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 28.5% outpaced its revenue gains
3. Free cash flow margin jumped by 4.1 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends

At $120.94 per share, Federal Signal trades at 28.1x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free for active Edge members .

Stocks We Like Even More

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