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.

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. Keeping that in mind, here are three Russell 2000 stocks to avoid and better alternatives to consider.

8x8 (EGHT)

Market Cap: $216.5 million

Founded in 1987, 8x8 (NYSE: EGHT) provides software for organizations to efficiently communicate and collaborate with their customers, employees, and partners.

Why Do We Think EGHT Will Underperform?

1. Customers had second thoughts about committing to its platform over the last year as its billings averaged 1.4% declines
2. Projected sales are flat for the next 12 months, implying demand will slow from its three-year trend
3. Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions

8x8 is trading at $1.60 per share, or 0.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than EGHT.

Fresh Del Monte Produce (FDP)

Market Cap: $1.65 billion

Translating to "of the mountain" in Spanish, Fresh Del Monte (NYSE: FDP) is a leader in providing high-quality, sustainably grown fresh fruits and vegetables.

Why Do We Steer Clear of FDP?

1. Sales stagnated over the last three years and signal the need for new growth strategies
2. Gross margin of 8.2% is an output of its commoditized products
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Fresh Del Monte Produce’s stock price of $34.48 implies a valuation ratio of 8.6x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why FDP doesn’t pass our bar.

Scholastic (SCHL)

Market Cap: $459.8 million

Creator of the legendary Scholastic Book Fair, Scholastic (NASDAQ: SCHL) is an international company specializing in children's publishing, education, and media services.

Why Are We Wary of SCHL?

1. Sales were flat over the last five years, indicating it's failed to expand its business
2. Subpar operating margin of 3% constrains its ability to invest in process improvements or effectively respond to new competitive threats
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

At $17.35 per share, Scholastic trades at 10x forward P/E. To fully understand why you should be careful with SCHL, check out our full research report (it’s free).

Stocks We Like More

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