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.
Appian (APPN)
Market Cap: $1.74 billion
Powering billions of transactions daily since its founding in 1999, Appian (NASDAQ: APPN) provides a low-code platform that helps businesses automate complex processes and operationalize artificial intelligence without extensive programming knowledge.
Why Do We Think Twice About APPN?
- Estimated sales growth of 10.5% for the next 12 months implies demand will slow from its two-year trend
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Poor free cash flow margin of 8.4% for the last year limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $24.02 per share, Appian trades at 2.1x forward price-to-sales. Read our free research report to see why you should think twice about including APPN in your portfolio.
Plug Power (PLUG)
Market Cap: $3.95 billion
Powering forklifts for Walmart’s distribution centers, Plug Power (NASDAQ: PLUG) provides hydrogen fuel cells used to power electric motors.
Why Are We Cautious About PLUG?
- Sales tumbled by 3.9% annually over the last two years, showing market trends are working against it during this cycle
- Negative free cash flow raises questions about the return timeline for its investments
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Plug Power’s stock price of $2.77 implies a valuation ratio of 4.7x forward price-to-sales. If you’re considering PLUG for your portfolio, see our FREE research report to learn more.
PennyMac Financial Services (PFSI)
Market Cap: $4.19 billion
Founded during the 2008 financial crisis to help address the mortgage market meltdown, PennyMac Financial Services (NYSE: PFSI) is a specialty financial services company that originates, services, and manages investments related to residential mortgage loans in the United States.
Why Does PFSI Fall Short?
- Annual sales declines of 12.1% for the past five years show its products and services struggled to connect with the market during this cycle
- 4% annual net interest income growth over the last five years was slower than its banking peers
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
PennyMac Financial Services is trading at $81.68 per share, or 0.9x forward P/B. Check out our free in-depth research report to learn more about why PFSI doesn’t pass our bar.
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