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. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Lincoln Educational (LINC)
Market Cap: $1.51 billion
Established in 1946, Lincoln Educational (NASDAQ: LINC) is a provider of specialized technical training in the United States, offering career-oriented programs to provide practical skills required in the workforce.
Why Do We Steer Clear of LINC?
- Demand for its offerings was relatively low as its number of enrolled students has underwhelmed
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $49.02 per share, Lincoln Educational trades at 56.9x forward P/E. Read our free research report to see why you should think twice about including LINC in your portfolio.
Diebold Nixdorf (DBD)
Market Cap: $2.83 billion
With roots dating back to 1859 and a presence in over 100 countries, Diebold Nixdorf (NYSE: DBD) provides automated self-service technology, software, and services that help banks and retailers digitize their customer transactions.
Why Do We Think DBD Will Underperform?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Earnings per share have contracted by 10% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -1% for the last five years
Diebold Nixdorf’s stock price of $84.56 implies a valuation ratio of 14x forward P/E. To fully understand why you should be careful with DBD, check out our full research report (it’s free).
ScanSource (SCSC)
Market Cap: $1.01 billion
Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ: SCSC) is a hybrid distributor that connects hardware, software, and cloud services from technology suppliers to resellers and business customers.
Why Does SCSC Fall Short?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.9% annually over the last two years
- Estimated sales growth of 2.4% for the next 12 months is soft and implies weaker demand
- Low free cash flow margin of 3.4% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
ScanSource is trading at $52.05 per share, or 11.4x forward P/E. Check out our free in-depth research report to learn more about why SCSC doesn’t pass our bar.
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