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.

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 avoid and better alternatives to consider.

Peloton (PTON)

Market Cap: $2.44 billion

Started as a Kickstarter campaign, Peloton (NASDAQ: PTON) is a fitness technology company known for its at-home exercise equipment and interactive online workout classes.

Why Do We Avoid PTON?

1. Sluggish trends in its connected fitness subscribers suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Forecasted revenue decline of 4.1% for the upcoming 12 months implies demand will fall even further
3. Historical operating margin losses point to an inefficient cost structure

Peloton is trading at $6.15 per share, or 7.2x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than PTON.

Petco (WOOF)

Market Cap: $669.6 million

Historically known for its window displays of pets for sale or adoption, Petco (NASDAQ: WOOF) is a specialty retailer of pet food and supplies as well as a provider of services such as wellness checks and grooming.

Why Do We Think WOOF Will Underperform?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
2. Earnings per share have contracted by 45.5% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
3. 8× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

At $2.44 per share, Petco trades at 17.4x forward P/E. If you’re considering WOOF for your portfolio, see our FREE research report to learn more.

Mission Produce (AVO)

Market Cap: $874.3 million

Founded in 1983 in California, Mission Produce (NASDAQ: AVO) grows, packages, and distributes avocados.

Why Is AVO Risky?

1. Revenue base of $1.39 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
2. Projected sales decline of 15% for the next 12 months points to a tough demand environment ahead
3. Gross margin of 10.9% is below its competitors, leaving less money to invest in areas like marketing and production facilities

Mission Produce’s stock price of $12.39 implies a valuation ratio of 15.8x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why AVO doesn’t pass our bar.

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