Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
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.
Power Integrations (POWI)
Market Cap: $3.93 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 Pass on POWI?
- Sales tumbled by 4.2% annually over the last five years, showing market trends are working against its favor during this cycle
- Operating profits fell over the last five years as its sales dropped and it struggled to adjust its fixed costs
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
Power Integrations’s stock price of $70.41 implies a valuation ratio of 47.6x forward P/E. Check out our free in-depth research report to learn more about why POWI doesn’t pass our bar.
B&G Foods (BGS)
Market Cap: $345 million
Started as a small grocery store in New York City, B&G Foods (NYSE: BGS) is an American packaged foods company with a diverse portfolio of more than 50 brands.
Why Do We Avoid BGS?
- Products have few die-hard fans as sales have declined by 5.4% annually over the last three years
- Issuance of new shares over the last three years caused its earnings per share to fall by 19.4% annually, even worse than its revenue declines
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
B&G Foods is trading at $4.25 per share, or 6.7x forward P/E. Dive into our free research report to see why there are better opportunities than BGS.
Insteel (IIIN)
Market Cap: $509.3 million
Growing from a small wire manufacturer to one of the largest in the U.S., Insteel (NYSE: IIIN) provides steel wire reinforcing products for concrete.
Why Are We Cautious About IIIN?
- Sales trends were unexciting over the last five years as its 5.9% annual growth was below the typical industrials company
- Free cash flow margin dropped by 5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Eroding returns on capital suggest its historical profit centers are aging
At $26.47 per share, Insteel trades at 14.9x forward P/E. If you’re considering IIIN for your portfolio, see our FREE research report to learn more.
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