3 Russell 2000 Stocks We Steer Clear Of

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.

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. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.

Lindsay (LNN)

Market Cap: $1.31 billion

A pioneer in the field of center pivot and lateral move irrigation, Lindsay (NYSE:LNN) provides a variety of proprietary water management and road infrastructure products and services.

Why Does LNN Worry Us?

1. Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
2. Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Lindsay’s stock price of $125.33 implies a valuation ratio of 20.2x forward P/E. Check out our free in-depth research report to learn more about why LNN doesn’t pass our bar.

ICU Medical (ICUI)

Market Cap: $3.30 billion

Founded in 1984 and named for its initial focus on intensive care units, ICU Medical (NASDAQ:ICUI) develops and manufactures medical products for infusion therapy, vascular access, and vital care applications used in hospitals and other healthcare settings.

Why Are We Wary of ICUI?

1. Flat sales over the last two years suggest it must find different ways to grow during this cycle
2. Projected sales decline of 1.8% for the next 12 months points to an even tougher demand environment ahead
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 11.1 percentage points

At $133.85 per share, ICU Medical trades at 16.4x forward P/E. To fully understand why you should be careful with ICUI, check out our full research report (it’s free).

Enact Holdings (ACT)

Market Cap: $5.72 billion

Playing a critical role in helping first-time homebuyers access the housing market, Enact Holdings (NASDAQ:ACT) provides private mortgage insurance that enables lenders to offer home loans with lower down payments while protecting against borrower defaults.

Why Is ACT Not Exciting?

1. Insurance offerings faced market headwinds this cycle, reflected in stagnant net premiums earned over the last five years
2. Estimated sales growth of 1.6% for the next 12 months implies demand will slow from its two-year trend
3. Earnings per share lagged its peers over the last two years as they only grew by 4.9% annually

Enact Holdings is trading at $40.44 per share, or 1x forward P/B. If you’re considering ACT for your portfolio, see our FREE research report to learn more.

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