Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.

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 avoid and better alternatives to consider.

Victoria's Secret (VSCO)

Market Cap: $1.69 billion

Spun off from L Brands in 2020, Victoria’s Secret (NYSE: VSCO) is an intimate clothing and beauty retailer that sells its own brands of lingerie, undergarments, and personal fragrances.

Why Do We Pass on VSCO?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
2. Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
3. Earnings per share have contracted by 25.8% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance

At $21.16 per share, Victoria's Secret trades at 9.8x forward P/E. Dive into our free research report to see why there are better opportunities than VSCO.

Insteel (IIIN)

Market Cap: $696.2 million

Growing from a small wire manufacturer to one of the largest in the U.S., Insteel (NYSE: IIIN) provides steel wire reinforcing products for concrete.

Why Does IIIN Worry Us?

1. Annual sales declines of 7% for the past two years show its products and services struggled to connect with the market during this cycle
2. Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 19.5% annually, worse than its revenue
3. Waning returns on capital imply its previous profit engines are losing steam

Insteel is trading at $35.87 per share, or 13.8x forward P/E. Check out our free in-depth research report to learn more about why IIIN doesn’t pass our bar.

Tri Pointe Homes (TPH)

Market Cap: $2.89 billion

Established in 2009 in California, Tri Pointe Homes (NYSE: TPH) is a United States homebuilder recognized for its innovative and sustainable approach to creating premium, life-enhancing homes.

Why Do We Steer Clear of TPH?

1. Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 7.6% declines over the past two years
2. Forecasted revenue decline of 18.5% for the upcoming 12 months implies demand will fall even further
3. Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 8.1% annually, worse than its revenue

Tri Pointe Homes’s stock price of $33.43 implies a valuation ratio of 11.7x forward P/E. If you’re considering TPH for your portfolio, see our FREE research report to learn more.

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