The Russell 2000 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.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
Varonis (VRNS)
Market Cap: $4.32 billion
Founded by a duo of former Israeli Defense Forces cyber warfare engineers, Varonis (NASDAQ:VRNS) offers software-as-service that helps customers protect data from cyber threats and gain visibility into how enterprise data is being used.
Why Do We Think Twice About VRNS?
- Annual revenue growth of 12.2% over the last three years was below our standards for the software sector
- Suboptimal cost structure is highlighted by its history of operating losses
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $38.31 per share, Varonis trades at 6.9x forward price-to-sales. If you’re considering VRNS for your portfolio, see our FREE research report to learn more.
Progyny (PGNY)
Market Cap: $1.93 billion
Pioneering a data-driven approach to family building that has achieved an industry-leading patient satisfaction score of +80, Progyny (NASDAQ:PGNY) provides comprehensive fertility and family building benefits solutions to employers, helping employees access quality fertility treatments and support services.
Why Does PGNY Give Us Pause?
- Modest revenue base of $1.17 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Estimated sales growth of 3.9% for the next 12 months implies demand will slow from its two-year trend
- Push for growth has led to negative returns on capital, signaling value destruction
Progyny’s stock price of $22.16 implies a valuation ratio of 13.9x forward price-to-earnings. To fully understand why you should be careful with PGNY, check out our full research report (it’s free).
CoreCivic (CXW)
Market Cap: $2.11 billion
Originally founded in 1983 as the first private prison company in the United States, CoreCivic (NYSE:CXW) operates correctional facilities, detention centers, and residential reentry programs for government agencies across the United States.
Why Do We Avoid CXW?
- Performance surrounding its average available beds has lagged its peers
- Earnings per share fell by 22.8% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Free cash flow margin shrank by 8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
CoreCivic is trading at $19.13 per share, or 19.4x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than CXW.
Stocks We Like More
Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.
While this has caused many investors to adopt a "fearful" wait-and-see approach, we’re leaning into our best ideas that can grow regardless of the political or macroeconomic climate. Take advantage of Mr. Market by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like United Rentals (+322% five-year return). Find your next big winner with StockStory today for free.