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.
Lincoln Educational (LINC)
Market Cap: $795.7 million
Established in 1946, Lincoln Educational (NASDAQ:LINC) is a provider of specialized technical training in the United States, offering career-oriented programs to provide practical skills required in the workforce.
Why Do We Avoid LINC?
- Demand for its offerings was relatively low as its number of enrolled students has underwhelmed
- Cash-burning history makes us doubt the long-term viability of its business model
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Lincoln Educational is trading at $25.17 per share, or 32.2x forward P/E. To fully understand why you should be careful with LINC, check out our full research report (it’s free).
Mercury General (MCY)
Market Cap: $4.93 billion
Founded in 1961 and maintaining a network of over 6,300 independent agents across the country, Mercury General (NYSE:MCY) is an insurance company that primarily sells automobile insurance policies through independent agents in 11 states, with a strong focus on California.
Why Are We Hesitant About MCY?
- Estimated sales growth of 2.4% for the next 12 months implies demand will slow from its two-year trend
- Muted 3.3% annual book value per share growth over the last five years shows its capital generation lagged behind its insurance peers
- Low return on equity reflects management’s struggle to allocate funds effectively
At $88.96 per share, Mercury General trades at 2.1x forward P/B. Read our free research report to see why you should think twice about including MCY in your portfolio.
Viavi Solutions (VIAV)
Market Cap: $4.02 billion
Once known as JDS Uniphase before its 2015 rebranding, Viavi Solutions (NASDAQ:VIAV) provides testing, monitoring and assurance solutions for telecommunications, cloud, enterprise, military, and other critical networks and infrastructure.
Why Should You Sell VIAV?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Free cash flow margin dropped by 7.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Viavi Solutions’s stock price of $17.93 implies a valuation ratio of 25.4x forward P/E. Check out our free in-depth research report to learn more about why VIAV doesn’t pass our bar.
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