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.

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 steer clear of and some alternatives to watch instead.

CarGurus (CARG)

Market Cap: $3.17 billion

Bringing transparency to a sometimes opaque process, CarGurus (NASDAQ: CARG) is a digital marketplace where auto dealers can connect with potential customers and where car buyers can browse, purchase, and obtain financing.

Why Do We Think Twice About CARG?

1. Market opportunities are plateauing as its paying dealers were flat over the last two years
2. Projected sales growth of 6.1% for the next 12 months suggests sluggish demand
3. Earnings per share lagged its peers over the last three years as they only grew by 5.8% annually

CarGurus is trading at $32.39 per share, or 11.9x forward EV/EBITDA. Dive into our free research report to see why there are better opportunities than CARG.

RXO (RXO)

Market Cap: $2.66 billion

With access to millions of trucks, RXO (NYSE: RXO) offers full-truckload, less-than-truckload, and last-mile deliveries.

Why Do We Think RXO Will Underperform?

1. Sales trends were unexciting over the last two years as its 6.2% annual growth was below the typical industrials company
2. Earnings per share fell by 38.8% annually over the last four years while its revenue grew, showing its incremental sales were much less profitable
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

At $16.21 per share, RXO trades at 57.4x forward P/E. Read our free research report to see why you should think twice about including RXO in your portfolio.

Proto Labs (PRLB)

Market Cap: $931.8 million

Pioneering the concept of online quoting and manufacturing for custom prototypes and low-volume production parts, Proto Labs (NYSE: PRLB) offers injection molding, 3D printing, and sheet metal fabrication for manufacturers in various industries.

Why Do We Steer Clear of PRLB?

1. Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
2. Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 7.3 percentage points
3. Earnings per share have contracted by 10.5% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance

Proto Labs’s stock price of $39.20 implies a valuation ratio of 26.6x forward P/E. If you’re considering PRLB for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today for free.