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 steer clear of and some alternatives to watch instead.
American Eagle (AEO)
Market Cap: $2.79 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 Do We Think Twice About AEO?
- Lackluster 3.8% annual revenue growth over the last three years indicates the company is losing ground to competitors
- Conservative approach to adding new stores shows management is focused on improving existing location performance
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up
American Eagle is trading at $16.66 per share, or 9.3x forward P/E. If you’re considering AEO for your portfolio, see our FREE research report to learn more.
Hillman (HLMN)
Market Cap: $1.47 billion
Established when Max Hillman purchased a franchise operation, Hillman (NASDAQ:HLMN) designs, manufactures, and sells industrial equipment and systems for various sectors.
Why Does HLMN Fall Short?
- Annual revenue growth of 2.1% over the last five years was below our standards for the industrials sector
- Subpar operating margin of 4.5% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Underwhelming 2.6% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $7.63 per share, Hillman trades at 11.4x forward P/E. To fully understand why you should be careful with HLMN, check out our full research report (it’s free).
Transocean (RIG)
Market Cap: $6.95 billion
Operating one of the world's most capable fleets of ultra-deepwater drillships and harsh environment rigs, Transocean (NYSE:RIG) operates drilling rigs that energy companies rent to drill oil and gas wells in deep ocean waters.
Why Are We Out on RIG?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.2% annually over the last ten years
- Gross margin of 37.9% is below its competitors, leaving less money to invest in exploration and production
- Poor free cash flow margin of 5.2% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Transocean’s stock price of $6.24 implies a valuation ratio of 33.1x forward P/E. Dive into our free research report to see why there are better opportunities than RIG.
Stocks We Like More
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+1,154% between June 2020 and June 2025). Find your next big winner with StockStory today.