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.
Five9 (FIVN)
Market Cap: $2.58 billion
Taking its name from the "five nines" (99.999%) standard for optimal service reliability in telecommunications, Five9 (NASDAQ:FIVN) provides cloud-based software that enables businesses to run their contact centers with tools for customer service, sales, and marketing across multiple communication channels.
Why Do We Avoid FIVN?
- Offerings struggled to generate meaningful interest as its average billings growth of 9.1% over the last year did not impress
- Anticipated sales growth of 10.5% for the next year implies demand will be shaky
- Sky-high servicing costs result in an inferior gross margin of 54.9% that must be offset through increased usage
At $34.14 per share, Five9 trades at 2.1x forward price-to-sales. Dive into our free research report to see why there are better opportunities than FIVN.
ABM (ABM)
Market Cap: $2.76 billion
With roots dating back to 1909 as a window washing company, ABM Industries (NYSE:ABM) provides integrated facility management, infrastructure, and mobility solutions across various sectors including commercial, manufacturing, education, and aviation.
Why Are We Cautious About ABM?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Earnings per share have dipped by 1.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
ABM’s stock price of $47.16 implies a valuation ratio of 11.6x forward P/E. To fully understand why you should be careful with ABM, check out our full research report (it’s free).
Insight Enterprises (NSIT)
Market Cap: $4.59 billion
With over 35 years of IT expertise and partnerships with more than 8,000 technology providers, Insight Enterprises (NASDAQ:NSIT) provides end-to-end digital transformation solutions that help businesses modernize their IT infrastructure and maximize the value of technology.
Why Are We Wary of NSIT?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3.5% for the last five years
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Insight Enterprises is trading at $156.42 per share, or 12x forward P/E. If you’re considering NSIT for your portfolio, see our FREE research report to learn more.
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