The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.
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 to steer clear of and some alternatives to watch instead.
Insperity (NSP)
Market Cap: $1.32 billion
Pioneering the professional employer organization (PEO) industry it helped establish, Insperity (NYSE: NSP) provides human resources outsourcing services to small and medium-sized businesses, handling payroll, benefits, compliance, and HR administration.
Why Do We Steer Clear of NSP?
- Sales trends were unexciting over the last two years as its 2.5% annual growth was below the typical business services company
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 30.5% annually
- Free cash flow margin shrank by 4.6 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Insperity’s stock price of $34.48 implies a valuation ratio of 0.2x forward price-to-sales. If you’re considering NSP for your portfolio, see our FREE research report to learn more.
Xerox (XRX)
Market Cap: $423.7 million
Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ: XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.
Why Should You Sell XRX?
- 1.5% annual revenue growth over the last five years was slower than its business services peers
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Xerox is trading at $3.31 per share, or 0.1x forward price-to-sales. Dive into our free research report to see why there are better opportunities than XRX.
Preferred Bank (PFBC)
Market Cap: $1.13 billion
Founded in 1991 with a focus on serving the Pacific Rim community in Southern California, Preferred Bank (NASDAQ: PFBC) is a commercial bank that provides banking products and services to small and mid-sized businesses, entrepreneurs, real estate developers, and high net worth individuals.
Why Does PFBC Give Us Pause?
- 9% annual net interest income growth over the last five years was slower than its banking peers
- 61.7 basis point (100 basis points = 1 percentage point) decline in its net interest margin over the last two years reflects the firm’s willingness to accept lower profitability to defend its market position
- Earnings per share lagged its peers over the last two years as they only grew by 1.3% annually
At $95.77 per share, Preferred Bank trades at 1.3x forward P/B. To fully understand why you should be careful with PFBC, check out our full research report (it’s free).
Stocks We Like More
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today.
