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.

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.

1-800-FLOWERS (FLWS)

Market Cap: $280.6 million

Founded in 1976, 1-800-FLOWERS (NASDAQ: FLWS) is an online retailer of flowers, gifts, and gourmet foods, serving customers globally.

Why Is FLWS Risky?

1. Products and services have few die-hard fans as sales have declined by 8.6% annually over the last two years
2. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

1-800-FLOWERS’s stock price of $4.41 implies a valuation ratio of 0.2x forward price-to-sales. Check out our free in-depth research report to learn more about why FLWS doesn’t pass our bar.

NeoGenomics (NEO)

Market Cap: $1.18 billion

Operating a network of CAP-accredited and CLIA-certified laboratories across the United States and United Kingdom, NeoGenomics (NASDAQ: NEO) provides specialized cancer diagnostic testing services, including genetic analysis, molecular testing, and pathology consultation for oncologists and healthcare providers.

Why Do We Think NEO Will Underperform?

1. Modest revenue base of $689.2 million gives it less fixed cost leverage and fewer distribution channels than larger companies
2. Negative returns on capital show that some of its growth strategies have backfired, and its decreasing returns suggest its historical profit centers are aging
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

NeoGenomics is trading at $8.92 per share, or 38x forward P/E. If you’re considering NEO for your portfolio, see our FREE research report to learn more.

U.S. Physical Therapy (USPH)

Market Cap: $1.36 billion

With a nationwide footprint spanning 671 clinics across 42 states, U.S. Physical Therapy (NYSE: USPH) operates a network of outpatient physical therapy clinics and provides industrial injury prevention services to employers across the United States.

Why Are We Hesitant About USPH?

1. Smaller revenue base of $729.6 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
2. Free cash flow margin dropped by 9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

At $89.53 per share, U.S. Physical Therapy trades at 34.5x forward P/E. To fully understand why you should be careful with USPH, check out our full research report (it’s free for active Edge members).

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