The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.
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. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
American Eagle (AEO)
Market Cap: $2.77 billion
With a heavy focus on denim, American Eagle Outfitters (NYSE:AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.
Why Are We Cautious About AEO?
- Conservative approach to adding new stores shows management is focused on improving existing location performance
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 3.9 percentage points
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
American Eagle’s stock price of $16.57 implies a valuation ratio of 9.6x forward P/E. Read our free research report to see why you should think twice about including AEO in your portfolio.
NeoGenomics (NEO)
Market Cap: $1.18 billion
Operating a network of CAP-accredited and CLIA-certified laboratories across the United States and United Kingdom, NeoGenomics (NASDAQ:NEO) provides specialized cancer diagnostic testing services, including genetic analysis, molecular testing, and pathology consultation for oncologists and healthcare providers.
Why Does NEO Worry Us?
- Modest revenue base of $746 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Push for growth has led to negative returns on capital, signaling value destruction
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $8.84 per share, NeoGenomics trades at 37.1x forward P/E. Dive into our free research report to see why there are better opportunities than NEO.
Mercury General (MCY)
Market Cap: $5.43 billion
Founded in 1961 and maintaining a network of over 6,300 independent agents across the country, Mercury General (NYSE:MCY) is an insurance company that primarily sells automobile insurance policies through independent agents in 11 states, with a strong focus on California.
Why Are We Hesitant About MCY?
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- Capital trends were unexciting over the last five years as its 4.2% annual book value per share growth was below the typical insurance firm
- Below-average return on equity indicates management struggled to find compelling investment opportunities
Mercury General is trading at $97.98 per share, or 1.9x forward P/B. Check out our free in-depth research report to learn more about why MCY doesn’t pass our bar.
Stocks We Like More
ALSO WORTH WATCHING: Top 5 Momentum Stocks. The best time to own a great stock is when the market is finally noticing it. These aren't just high-quality businesses. Something is happening with them right now. Elite fundamentals meeting near-term momentum - both boxes checked at the same time.
Find out which stocks our AI platform is flagging this week. See this week's Strong Momentum stocks - FREE. Get Our Strong Momentum Stocks for Free HERE.
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today.