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.
Marcus & Millichap (MMI)
Market Cap: $1.25 billion
Founded in 1971, Marcus & Millichap (NYSE:MMI) specializes in commercial real estate investment sales, financing, research, and advisory services.
Why Is MMI Risky?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Low free cash flow margin of -0.2% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Diminishing returns on capital suggest its earlier profit pools are drying up
Marcus & Millichap is trading at $32.18 per share, or 247.5x forward P/E. Check out our free in-depth research report to learn more about why MMI doesn’t pass our bar.
ABM (ABM)
Market Cap: $2.79 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 Is ABM Not Exciting?
- 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
- Annual earnings per share growth of 1.2% underperformed its revenue over the last two years, showing its incremental sales were less profitable
- 6.4 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
ABM’s stock price of $45.49 implies a valuation ratio of 11.3x forward P/E. Dive into our free research report to see why there are better opportunities than ABM.
HNI (HNI)
Market Cap: $2.08 billion
With roots dating back to 1944 and a significant acquisition of Kimball International in 2023, HNI (NYSE:HNI) manufactures and sells office furniture systems, seating, and storage solutions, as well as residential fireplaces and heating products.
Why Does HNI Worry Us?
- Muted 4.9% annual revenue growth over the last five years shows its demand lagged behind its business services peers
- Estimated sales growth of 3.4% for the next 12 months implies demand will slow from its two-year trend
- Free cash flow margin dropped by 2.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $45.43 per share, HNI trades at 12.2x forward P/E. To fully understand why you should be careful with HNI, check out our full research report (it’s free).
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