The Russell 2000 (^RUT) is packed with potential breakout stocks, thanks to its focus on smaller companies with high growth potential. However, smaller size also means these businesses often lack the resilience and financial flexibility of large-cap firms, making careful selection crucial.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
nLIGHT (LASR)
Market Cap: $3.96 billion
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 Is LASR Not Exciting?
- 3.8% annual revenue growth over the last five years was slower than its industrials peers
- Persistent operating margin losses suggest the business manages its expenses poorly
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
At $70.55 per share, nLIGHT trades at 134.1x forward P/E. Read our free research report to see why you should think twice about including LASR in your portfolio.
Simply Good Foods (SMPL)
Market Cap: $1.14 billion
Best known for its Atkins brand that was inspired by the popular diet of the same name, Simply Good Foods (NASDAQ: SMPL) is a packaged food company whose offerings help customers achieve their healthy eating or weight loss goals.
Why Are We Out on SMPL?
- Muted 6% annual revenue growth over the last three years shows its demand lagged behind its consumer staples peers
- Estimated sales decline of 5.4% for the next 12 months implies a challenging demand environment
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 24.4 percentage points
Simply Good Foods’s stock price of $12.65 implies a valuation ratio of 7.6x forward P/E. Dive into our free research report to see why there are better opportunities than SMPL.
Kforce (KFRC)
Market Cap: $834.9 million
With nearly 60 years of matching skilled professionals with the right opportunities, Kforce (NYSE: KFRC) is a professional staffing company that specializes in placing technology and finance experts with businesses on both temporary and permanent bases.
Why Do We Think KFRC Will Underperform?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.4% annually over the last five years
- Sales were less profitable over the last five years as its earnings per share fell by 7% annually, worse than its revenue declines
- Eroding returns on capital suggest its historical profit centers are aging
Kforce is trading at $49.90 per share, or 19.8x forward P/E. If you’re considering KFRC for your portfolio, see our FREE research report to learn more.
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