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

Flywire (FLYW)

Market Cap: $1.67 billion

Initially created to solve the challenges of international student tuition payments, Flywire (NASDAQ: FLYW) provides specialized payment processing and software solutions that help educational institutions, healthcare systems, travel companies, and businesses manage complex payments.

Why Does FLYW Worry Us?

1. Steep infrastructure costs and weaker unit economics for a software company are reflected in its low gross margin of 62.9%
2. Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
3. Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage

Flywire’s stock price of $13.70 implies a valuation ratio of 2.6x forward price-to-sales. Read our free research report to see why you should think twice about including FLYW in your portfolio.

PlayStudios (MYPS)

Market Cap: $121.3 million

Founded by a team of former gaming industry executives, PlayStudios (NASDAQ: MYPS) offers free-to-play digital casino games.

Why Are We Out on MYPS?

1. Sluggish trends in its daily active users suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Historical operating margin losses point to an inefficient cost structure
3. Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term

At $0.97 per share, PlayStudios trades at 2.4x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than MYPS.

Arhaus (ARHS)

Market Cap: $1.50 billion

With an aesthetic that features natural materials such as reclaimed wood, Arhaus (NASDAQ: ARHS) is a high-end furniture retailer that sells everything from sofas to rugs to bookcases.

Why Are We Hesitant About ARHS?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
2. Subscale operations are evident in its revenue base of $1.34 billion, meaning it has fewer distribution channels than its larger rivals
3. Earnings per share have dipped by 10.2% annually over the past three years, which is concerning because stock prices follow EPS over the long term

Arhaus is trading at $10.62 per share, or 24.1x forward P/E. If you’re considering ARHS for your portfolio, see our FREE research report to learn more.

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