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. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Asure Software (ASUR)
Market Cap: $237.8 million
Operating in the often-overlooked smaller metropolitan markets where HR expertise can be scarce, Asure Software (NASDAQ: ASUR) provides cloud-based human capital management software and services that help small and medium-sized businesses manage payroll, taxes, time tracking, and HR compliance.
Why Does ASUR Worry Us?
- Average billings growth of 14.2% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Operating margin improvement of 3 percentage points over the last year demonstrates its ability to scale efficiently
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Asure Software is trading at $8.41 per share, or 1.6x forward price-to-sales. To fully understand why you should be careful with ASUR, check out our full research report (it’s free).
Impinj (PI)
Market Cap: $2.98 billion
Founded by Caltech professor Carver Mead and one of his students Chris Diorio, Impinj (NASDAQ: PI) is a maker of radio-frequency identification (RFID) hardware and software.
Why Are We Cautious About PI?
- Estimated sales growth of 1.3% for the next 12 months implies demand will slow from its two-year trend
- Suboptimal cost structure is highlighted by its history of operating margin losses
- Push for growth has led to negative returns on capital, signaling value destruction
At $97.79 per share, Impinj trades at 52.3x forward P/E. If you’re considering PI for your portfolio, see our FREE research report to learn more.
Werner (WERN)
Market Cap: $1.63 billion
Conducting business in over a 100 countries, Werner (NASDAQ: WERN) offers full-truckload, less-than-truckload, and intermodal delivery services.
Why Do We Think WERN Will Underperform?
- Annual sales declines of 4.8% for the past two years show its products and services struggled to connect with the market during this cycle
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 67.1% annually while its revenue grew
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Werner’s stock price of $27.02 implies a valuation ratio of 36.1x forward P/E. Check out our free in-depth research report to learn more about why WERN doesn’t pass our bar.
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