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.

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 that don’t make the cut and some better choices instead.

Kura Sushi (KRUS)

Market Cap: $824.2 million

Known for its conveyor belt that transports dishes to diners, Kura Sushi (NASDAQ: KRUS) is a chain of sushi restaurants serving traditional Japanese fare with a touch of modernity and technology.

Why Are We Cautious About KRUS?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

Kura Sushi’s stock price of $69.14 implies a valuation ratio of 40.8x forward EV-to-EBITDA. To fully understand why you should be careful with KRUS, check out our full research report (it’s free).

Wiley (WLY)

Market Cap: $1.66 billion

With roots dating back to 1807 when Charles Wiley opened a small printing shop in Manhattan, John Wiley & Sons (NYSE: WLY) is a global academic publisher that provides scientific journals, books, digital courseware, and knowledge solutions for researchers, students, and professionals.

Why Should You Dump WLY?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.2% annually over the last five years
2. Estimated sales for the next 12 months are flat and imply a softer demand environment
3. Free cash flow margin shrank by 4.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

At $31.36 per share, Wiley trades at 1x trailing 12-month price-to-sales. If you’re considering WLY for your portfolio, see our FREE research report to learn more.

Mayville Engineering (MEC)

Market Cap: $384.6 million

Originally founded solely on tool and die manufacturing, Mayville Engineering Company (NYSE: MEC) specializes in metal fabrication, tube bending, and welding to be used in various industries.

Why Is MEC Not Exciting?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.1% annually over the last two years
2. Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 12.8%
3. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term

Mayville Engineering is trading at $18.93 per share, or 83.7x forward P/E. Read our free research report to see why you should think twice about including MEC in your portfolio.

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