There’s been a significant divergence in the way in which large-cap stocks have performed versus their small-to-mid cap counterparts. More poignantly, U.S. equities performance is increasingly tied to how larger, well-known companies are doing. The way in which indices like the Nasdaq and S&P500 have risen against the Russell 2000 showcases this. The S&P500 currently leads the pack having risen nearly 7% on a year-to-date (YTD) basis. So far, the Nasdaq has risen 4%. On the other hand, the Russell 2000 index is essentially trading flat. The Russell 2000 tracks various small and mid-cap stocks, and its underwhelming performance indicates a large chunk of these stocks are ones to avoid.
Elevated interest rates, sustained inflation and a slowing U.S. economy could lead to more losses for the Russell 2000. Below are 3 Russell 2000 stocks to avoid in case the market swings downward.
IonQ (IONQ)
The quantum computing landscape is full of capable start-up firms working to make computing systems based on quantum mechanics readily available. Last year’s artificial intelligence craze that ensnared market watchers and participants breathed life into many pure-play quantum computing stocks as equities investors hoped to find the next big technological innovation. Unfortunately, higher interest rates and uncertain macroeconomics has dried up interest in loss-making start-up companies. This makes IonQ (NYSE:IONQ) the first Russell 2000 stock on this list to avoid.
The quantum computing firm’s ion-trapping technique and novel Forte quantum computer are certainly innovations to be excited about. Unfortunately, the current use cases for quantum computing power remain limited. Moreover, to continue building out its products, IonQ will require more injections of equity capital and market conditions are not very amenable these days.
IONQ shares have plummeted 28% since the start of 2024 and further market volatility could lead to shares slipping even further.
Agilysys (AGYS)
The next Russell 2000 stock to make this list is Agilysys (NASDAQ:AGYS). This enterprise software company builds cloud-based POS and property management systems for hoteliers and other businesses operating in the hospitality industry. There’s clearly a demand for these kinds of solutions in Agilysys’s end markets. The company has been able to maintain solid double-digit revenue growth in both 2022 and 2023. Not to mention, unlike so many other software stocks, Agilysys remains profitable on a GAAP basis in its most recent earnings report.
Despite these good aspects, Agilysys deserves a spot on this list because of its stretched trading multiple valuation. AGYS has slid by around 1% on a YTD basis, yet the stock is trading at 69.2x forward earnings. In the event of a market downturn, stocks with expensive multiples are typically the ones most hit. There’s no doubt in my mind, AGYS will see a lot of downward pressure if the macroeconomic environment doesn’t clear up.
National Vision (EYE)
National Vision (NASDAQ:EYE) operates a chain of optical retail stores, including retail brands like America’s Best, that offer eyeglasses, contact lenses and eye examinations. The company’s recent round of earnings reports has left a lot to be desired. While revenue growth remains intact, National Vision’s net income has decreased significantly, slipping the company into unprofitable territory.
In their fourth quarter earnings report for 2023, National Vision revealed that total revenue for 2023 grew 6%, yet the company also reported a net loss of $66 million versus net income of $42 million in 2022. If National Vision continues to churn out losses, the stock’s ability to perform well in 2024 becomes questionable. On a YTD basis, EYE has fallen over 16%.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.