3 Russell 2000 Stocks We Think Twice About

Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.

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.

Wiley (WLY)

Market Cap: $2 billion

With roots dating back to 1807 when Charles Wiley opened a small printing shop in Manhattan, John Wiley & Sons (NYSE:WLY) is a global academic publisher that provides scientific journals, books, digital courseware, and knowledge solutions for researchers, students, and professionals.

Why Do We Avoid WLY?

1. Sales tumbled by 1.9% annually over the last five years, showing market trends are working against its favor during this cycle
2. Earnings per share have dipped by 1.3% annually over the past two years, which is concerning because stock prices follow EPS over the long term
3. 7.3 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

Wiley is trading at $37.60 per share, or 5.6x forward EV-to-EBITDA. If you’re considering WLY for your portfolio, see our FREE research report to learn more.

Benchmark (BHE)

Market Cap: $1.52 billion

Operating as a critical behind-the-scenes partner for complex technology products since 1979, Benchmark Electronics (NYSE:BHE) provides advanced manufacturing, engineering, and technology solutions for original equipment manufacturers across aerospace, medical, industrial, and technology sectors.

Why Are We Out on BHE?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 6.3% annually over the last two years
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

Benchmark’s stock price of $42.39 implies a valuation ratio of 17.4x forward P/E. To fully understand why you should be careful with BHE, check out our full research report (it’s free for active Edge members).

OPENLANE (KAR)

Market Cap: $2.86 billion

Facilitating the sale of approximately 1.3 million used vehicles in 2023, OPENLANE (NYSE:KAR) operates digital marketplaces that connect sellers and buyers of used vehicles across North America and Europe, facilitating wholesale transactions.

Why Should You Dump KAR?

1. Annual sales declines of 5.3% for the past five years show its products and services struggled to connect with the market during this cycle
2. ROIC of 2.6% reflects management’s challenges in identifying attractive investment opportunities
3. High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate

At $26.95 per share, OPENLANE trades at 23x forward P/E. Dive into our free research report to see why there are better opportunities than KAR.

Stocks We Like More

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