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 to avoid and better alternatives to consider.

El Pollo Loco (LOCO)

Market Cap: $308.5 million

With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ: LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.

Why Do We Avoid LOCO?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
2. Smaller revenue base of $480.8 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
3. Projected sales growth of 4.3% for the next 12 months suggests sluggish demand

At $10.16 per share, El Pollo Loco trades at 11.2x forward P/E. Read our free research report to see why you should think twice about including LOCO in your portfolio.

Carter's (CRI)

Market Cap: $1.04 billion

Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE: CRI) is an American designer and marketer of children's apparel.

Why Do We Think CRI Will Underperform?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
2. Anticipated sales growth of 1.8% for the next year implies demand will be shaky
3. Waning returns on capital imply its previous profit engines are losing steam

Carter's is trading at $28.85 per share, or 13.2x forward P/E. To fully understand why you should be careful with CRI, check out our full research report (it’s free for active Edge members).

TEGNA (TGNA)

Market Cap: $3.21 billion

Spun out of Gannett in 2015, TEGNA (NYSE: TGNA) is a media company operating a network of television stations and digital platforms, focusing on local news and community content.

Why Should You Dump TGNA?

1. Annual revenue declines of 3.7% over the last two years indicate problems with its market positioning
2. Forecasted revenue decline of 1.4% for the upcoming 12 months implies demand will fall even further
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

TEGNA’s stock price of $19.97 implies a valuation ratio of 8.9x forward P/E. Check out our free in-depth research report to learn more about why TGNA doesn’t pass our bar.

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