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.

Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.

nLIGHT (LASR)

Market Cap: $966 million

Founded by a former CEO and Harvard-educated entrepreneur Scott Keeneyn, nLIGHT (NASDAQ: LASR) offers semiconductor and fiber lasers to the industrial, aerospace & defense, and medical sectors.

Why Do We Avoid LASR?

1. Annual sales declines of 5.8% for the past two years show its products and services struggled to connect with the market during this cycle
2. Free cash flow margin dropped by 5.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

nLIGHT is trading at $19.08 per share, or 4.3x forward price-to-sales. To fully understand why you should be careful with LASR, check out our full research report (it’s free).

Strategic Education (STRA)

Market Cap: $1.86 billion

Formed through the merger of Strayer Education and Capella Education in 2018, Strategic Education (NASDAQ: STRA) is a career-focused higher education provider.

Why Should You Sell STRA?

1. Performance surrounding its domestic students has lagged its peers
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 7.5% annually
3. ROIC of 3.7% reflects management’s challenges in identifying attractive investment opportunities

At $77.34 per share, Strategic Education trades at 13.6x forward P/E. If you’re considering STRA for your portfolio, see our FREE research report to learn more.

Columbia Financial (CLBK)

Market Cap: $1.57 billion

Founded during the Roaring Twenties in 1926 and headquartered in Fair Lawn, New Jersey, Columbia Financial (NASDAQ: CLBK) operates federally chartered savings banks in New Jersey that offer traditional banking services including loans, deposits, and insurance products.

Why Should You Dump CLBK?

1. Loans are facing significant end-market challenges during this cycle as net interest income has declined by 4.9% annually over the last four years
2. Net interest margin dropped by 94.7 basis points (100 basis points = 1 percentage point) over the last two years, implying the company’s spreads fell as competitors entered the market
3. Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 38.6% annually, worse than its revenue

Columbia Financial’s stock price of $14.95 implies a valuation ratio of 1.4x forward P/B. Check out our free in-depth research report to learn more about why CLBK doesn’t pass our bar.

Stocks We Like More

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