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.

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 to avoid and better alternatives to consider.

Under Armour (UAA)

Market Cap: $1.97 billion

Founded in 1996 by a former University of Maryland football player, Under Armour (NYSE: UAA) is an apparel brand specializing in sportswear designed to improve athletic performance.

Why Is UAA Risky?

1. Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
2. Negative free cash flow raises questions about the return timeline for its investments
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Under Armour’s stock price of $4.65 implies a valuation ratio of 57.9x forward P/E. Read our free research report to see why you should think twice about including UAA in your portfolio.

SoundHound AI (SOUN)

Market Cap: $2.69 billion

Born from the idea that machines should understand human speech as naturally as people do, SoundHound AI (NASDAQ: SOUN) develops voice recognition and conversational intelligence technology that enables businesses to integrate voice assistants into their products and services.

Why Does SOUN Worry Us?

1. Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
2. Cash-burning history makes us doubt the long-term viability of its business model
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

At $6.05 per share, SoundHound AI trades at 8.7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than SOUN.

WaFd Bank (WAFD)

Market Cap: $2.22 billion

Founded in 1917 and rebranded from Washington Federal in 2023, WaFd (NASDAQ: WAFD) is a bank holding company that provides lending, deposit services, and insurance through its Washington Federal Bank subsidiary across eight western states.

Why Should You Sell WAFD?

1. Net interest income trends were unexciting over the last five years as its 7.4% annual growth was below the typical banking firm
2. Performance over the past two years shows its incremental sales were less profitable as its earnings per share were flat
3. Estimated tangible book value per share decline of 2.8% for the next 12 months implies a challenging profitability environment

WaFd Bank is trading at $29.98 per share, or 0.8x forward P/B. Check out our free in-depth research report to learn more about why WAFD doesn’t pass our bar.

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