3 Russell 2000 Stocks Skating on Thin Ice

May 05, 2025 at 00:31 AM EDT

ALRM Cover Image

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. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.

Alarm.com (ALRM)

Market Cap: $2.71 billion

Founded in 2000 as a business unit within MicroStrategy, Alarm.com (NASDAQ: ALRM) is a software-as-a-service platform that enables users to control their security systems and smart home appliances from a single app.

Why Does ALRM Give Us Pause?

Products, pricing, or go-to-market strategy may need some adjustments as its 6.5% average billings growth over the last year was weak
Estimated sales growth of 4.1% for the next 12 months implies demand will slow from its three-year trend
Steep infrastructure costs and weaker unit economics for a software company are reflected in its low gross margin of 65.3%

Alarm.com’s stock price of $53.42 implies a valuation ratio of 3.3x forward price-to-sales. Check out our free in-depth research report to learn more about why ALRM doesn’t pass our bar.

Sweetgreen (SG)

Market Cap: $2.45 billion

Founded in 2007 by three Georgetown University alum, Sweetgreen (NYSE: SG) is a casual quick service chain known for its healthy salads and bowls.

Why Are We Hesitant About SG?

Suboptimal cost structure is highlighted by its history of operating losses
Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

At $20.76 per share, Sweetgreen trades at 69.1x forward EV-to-EBITDA. If you’re considering SG for your portfolio, see our FREE research report to learn more.

American Woodmark (AMWD)

Market Cap: $897.3 million

Starting as a small millwork shop, American Woodmark (NASDAQ: AMWD) is a cabinet manufacturing company that helps customers from inspiration to installation.

Why Do We Steer Clear of AMWD?

Customers postponed purchases of its products and services this cycle as its revenue declined by 8.1% annually over the last two years
Earnings per share were flat over the last five years and fell short of the peer group average
Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.7 percentage points

American Woodmark is trading at $60.49 per share, or 8x forward P/E. Read our free research report to see why you should think twice about including AMWD in your portfolio.

Stocks We Like More

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3 Russell 2000 Stocks Skating on Thin Ice

Alarm.com (ALRM)

Sweetgreen (SG)

American Woodmark (AMWD)

Stocks We Like More

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