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.
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 avoid and better alternatives to consider.
Grocery Outlet (GO)
Market Cap: $1.19 billion
Due to its differentiated procurement and buying approach, Grocery Outlet (NASDAQ: GO) is a discount grocery store chain that offers substantial discounts on name-brand products.
Why Are We Bearish on GO?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 8.8 percentage points
- High net-debt-to-EBITDA ratio of 7× could force the company to raise capital on unfavorable terms if market conditions deteriorate
At $11.94 per share, Grocery Outlet trades at 20x forward P/E. To fully understand why you should be careful with GO, check out our full research report (it’s free).
Carter's (CRI)
Market Cap: $1.19 billion
Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE: CRI) is an American designer and marketer of children's apparel.
Why Are We Out on CRI?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 1.3 percentage points
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Carter's is trading at $32.37 per share, or 9.2x forward P/E. Check out our free in-depth research report to learn more about why CRI doesn’t pass our bar.
Gray Television (GTN)
Market Cap: $449.2 million
Specializing in local media coverage, Gray Television (NYSE: GTN) is a broadcast company supplying digital media to various markets in the United States.
Why Do We Avoid GTN?
- Muted 4.8% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Unchanged returns on capital make it difficult for the company’s valuation multiple to re-rate
- 8× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Gray Television’s stock price of $4.62 implies a valuation ratio of 6.1x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than GTN.
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+1,154% between June 2020 and June 2025). Find your next big winner with StockStory today.
