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 that don’t make the cut and some better choices instead.
ArcBest (ARCB)
Market Cap: $2.63 billion
Historically owning furniture, banking, and other subsidiaries, ArcBest (NASDAQ: ARCB) offers full-truckload, less-than-truckload, and intermodal deliveries of freight.
Why Should You Dump ARCB?
- Underwhelming unit sales over the past two years imply it may need to invest in improvements to get back on track
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 2% annually
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $118.31 per share, ArcBest trades at 21.2x forward P/E. If you’re considering ARCB for your portfolio, see our FREE research report to learn more.
Perma-Fix (PESI)
Market Cap: $204.2 million
Tackling hazardous waste challenges since 1990, Perma-Fix (NASDAQ: PESI) provides environmental waste treatment services.
Why Should You Sell PESI?
- Sales tumbled by 10.7% annually over the last five years, showing market trends are working against its favor during this cycle
- Free cash flow margin shrank by 26.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Perma-Fix’s stock price of $11.05 implies a valuation ratio of 2.5x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PESI.
MillerKnoll (MLKN)
Market Cap: $1.06 billion
Created through the 2021 merger of industry icons Herman Miller and Knoll, MillerKnoll (NASDAQ: MLKN) designs, manufactures, and distributes interior furnishings for offices, healthcare facilities, educational settings, and homes worldwide.
Why Are We Cautious About MLKN?
- Muted 1.4% annual revenue growth over the last two years shows its demand lagged behind its business services peers
- Issuance of new shares over the last five years caused its earnings per share to fall by 7.9% annually while its revenue grew
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
MillerKnoll is trading at $15.57 per share, or 8.4x forward P/E. Check out our free in-depth research report to learn more about why MLKN doesn’t pass our bar.
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