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. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
nLIGHT (LASR)
Market Cap: $3.59 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 Does LASR Worry Us?
- 3.2% annual revenue growth over the last five years was slower than its industrials peers
- Cash-burning history makes us doubt the long-term viability of its business model
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
nLIGHT’s stock price of $63.98 implies a valuation ratio of 201x forward P/E. Check out our free in-depth research report to learn more about why LASR doesn’t pass our bar.
Accel Entertainment (ACEL)
Market Cap: $876.9 million
Established in Illinois, Accel Entertainment (NYSE:ACEL) is a provider of electronic gaming machines and interactive amusement terminals to bars and entertainment venues.
Why Do We Steer Clear of ACEL?
- Number of video gaming terminals sold has disappointed over the past two years, indicating weak demand for its offerings
- Free cash flow margin is expected to increase by 1.1 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $10.75 per share, Accel Entertainment trades at 12.5x forward P/E. Dive into our free research report to see why there are better opportunities than ACEL.
First Financial Bankshares (FFIN)
Market Cap: $4.13 billion
With roots dating back to 1890 and a network spanning over 70 locations across the Lone Star State, First Financial Bankshares (NASDAQ:FFIN) is a Texas-focused regional bank providing commercial banking, trust services, and wealth management across numerous communities throughout the state.
Why Are We Wary of FFIN?
- Muted 5.3% annual revenue growth over the last five years shows its demand lagged behind its banking peers
- 7.4% annual net interest income growth over the last five years was slower than its banking peers
- Earnings per share lagged its peers over the last five years as they only grew by 4.7% annually
First Financial Bankshares is trading at $28.99 per share, or 2x forward P/B. Read our free research report to see why you should think twice about including FFIN in your portfolio.
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