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.

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 to avoid and better alternatives to consider.

Dole (DOLE)

Market Cap: $1.21 billion

Known for its delicious pineapples and Hawaiian roots, Dole (NYSE: DOLE) is a global agricultural company specializing in fresh fruits and vegetables.

Why Do We Avoid DOLE?

1. Sales stagnated over the last three years and signal the need for new growth strategies
2. Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 8.4% that must be offset through higher volumes
3. Poor expense management has led to an operating margin of 2.8% that is below the industry average

Dole is trading at $12.74 per share, or 9.3x forward P/E. Read our free research report to see why you should think twice about including DOLE in your portfolio.

Heartland Express (HTLD)

Market Cap: $603.8 million

Founded by the son of a trucker, Heartland Express (NASDAQ: HTLD) offers full-truckload deliveries across the United States and Mexico.

Why Do We Pass on HTLD?

1. Sales tumbled by 14.2% annually over the last two years, showing market trends are working against its favor during this cycle
2. 12.7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Heartland Express’s stock price of $7.80 implies a valuation ratio of 8.8x forward EV-to-EBITDA. To fully understand why you should be careful with HTLD, check out our full research report (it’s free for active Edge members).

Telephone and Data Systems (TDS)

Market Cap: $4.45 billion

Operating primarily through its majority-owned subsidiary UScellular and wholly-owned TDS Telecom, Telephone and Data Systems (NYSE: TDS) provides wireless, broadband, video, and voice communications services to 4.6 million wireless and 1.2 million broadband customers across the United States.

Why Do We Think TDS Will Underperform?

1. Annual sales declines of 1.5% for the past five years show its products and services struggled to connect with the market during this cycle
2. Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
3. High net-debt-to-EBITDA ratio of 20× could force the company to raise capital at unfavorable terms if market conditions deteriorate

At $38.82 per share, Telephone and Data Systems trades at 7.4x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why TDS doesn’t pass our bar.

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