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

ThredUp (TDUP)

Market Cap: $753.2 million

Founded to revolutionize thrifting, ThredUp (NASDAQ: TDUP) is a leading online fashion resale marketplace offering a wide selection of gently-used clothing and accessories.

Why Do We Think TDUP Will Underperform?

1. Performance surrounding its orders has lagged its peers
2. Historical operating losses point to an inefficient cost structure
3. Cash burn makes us question whether it can achieve sustainable long-term growth

ThredUp is trading at $6.40 per share, or 86.8x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including TDUP in your portfolio.

Figs (FIGS)

Market Cap: $820.7 million

Rising to fame via TikTok and founded in 2013 by Heather Hasson and Trina Spear, Figs (NYSE: FIGS) is a healthcare apparel company known for its stylish approach to medical attire and uniforms.

Why Are We Hesitant About FIGS?

1. Sluggish trends in its active customers suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Earnings per share have dipped by 37.6% annually over the past four years, which is concerning because stock prices follow EPS over the long term
3. Push for growth has led to negative returns on capital, signaling value destruction

Figs’s stock price of $4.49 implies a valuation ratio of 65.5x forward P/E. Check out our free in-depth research report to learn more about why FIGS doesn’t pass our bar.

Applied Industrial (AIT)

Market Cap: $8.46 billion

Formerly called The Ohio Ball Bearing Company, Applied Industrial (NYSE: AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.

Why Does AIT Fall Short?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Estimated sales growth of 5% for the next 12 months is soft and implies weaker demand
3. Free cash flow margin was stuck in limbo over the last five years

At $222.03 per share, Applied Industrial trades at 20.8x forward P/E. If you’re considering AIT for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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