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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.
Energy Recovery (ERII)
Market Cap: $552.6 million
Having saved far more than a trillion gallons of water, Energy Recovery (NASDAQ: ERII) provides energy recovery devices to the water treatment, oil and gas, and chemical processing sectors.
Why Do We Think Twice About ERII?
- 2.6% annual revenue growth over the last two years was slower than its industrials peers
- Estimated sales decline of 12.7% for the next 12 months implies a challenging demand environment
- Waning returns on capital imply its previous profit engines are losing steam
Energy Recovery’s stock price of $10.58 implies a valuation ratio of 16.4x forward P/E. Read our free research report to see why you should think twice about including ERII in your portfolio.
Allient (ALNT)
Market Cap: $1.25 billion
Founded in 1962, Allient (NASDAQ: ALNT) develops and manufactures precision and specialty-controlled motion components and systems.
Why Does ALNT Give Us Pause?
- Sales tumbled by 2.1% annually over the last two years, showing market trends are working against its favor during this cycle
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Low returns on capital reflect management’s struggle to allocate funds effectively
Allient is trading at $73.51 per share, or 28.3x forward P/E. Check out our free in-depth research report to learn more about why ALNT doesn’t pass our bar.
Merit Medical Systems (MMSI)
Market Cap: $4.16 billion
Founded in 1987 and now offering over 1,700 patented products across global markets, Merit Medical Systems (NASDAQ: MMSI) manufactures and markets specialized medical devices used in minimally invasive procedures for cardiology, radiology, oncology, critical care, and endoscopy.
Why Are We Wary of MMSI?
- Revenue base of $1.52 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Underwhelming 5.1% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $69.79 per share, Merit Medical Systems trades at 17.6x forward P/E. If you’re considering MMSI for your portfolio, see our FREE research report to learn more.
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