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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
Power Integrations (POWI)
Market Cap: $3.05 billion
A leading supplier of parts for electronics such as home appliances, Power Integrations (NASDAQ: POWI) is a semiconductor designer and developer specializing in products used for high-voltage power conversion.
Why Do We Avoid POWI?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 11.7 percentage points
- Earnings per share have dipped by 3.1% annually over the past five years, which is concerning because stock prices follow EPS over the long term
Power Integrations’s stock price of $54.25 implies a valuation ratio of 31.5x forward P/E. If you’re considering POWI for your portfolio, see our FREE research report to learn more.
Monarch (MCRI)
Market Cap: $1.92 billion
Established in 1993, Monarch (NASDAQ: MCRI) operates luxury casinos and resorts, offering high-end gaming, dining, and hospitality experiences.
Why Does MCRI Give Us Pause?
- Annual revenue growth of 4% over the last two years was below our standards for the consumer discretionary sector
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 4.4%
Monarch is trading at $104.50 per share, or 21x forward P/E. Read our free research report to see why you should think twice about including MCRI in your portfolio.
HNI (HNI)
Market Cap: $2.37 billion
With roots dating back to 1944 and a significant acquisition of Kimball International in 2023, HNI (NYSE: HNI) manufactures and sells office furniture systems, seating, and storage solutions, as well as residential fireplaces and heating products.
Why Is HNI Not Exciting?
- Muted 2.7% annual revenue growth over the last five years shows its demand lagged behind its business services peers
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 3.2 percentage points
At $50.98 per share, HNI trades at 14.4x forward P/E. To fully understand why you should be careful with HNI, check out our full research report (it’s free).
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