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.
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 avoid and better alternatives to consider.
Marqeta (MQ)
Market Cap: $1.77 billion
Powering the cards behind innovative fintech services like Block's Cash App, Marqeta (NASDAQ:MQ) provides a cloud-based platform that allows businesses to create customized payment card programs and process card transactions.
Why Does MQ Fall Short?
- Sales trends were unexciting over the last five years as its 11% annual growth was below the typical software company
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 8.9 percentage points
Marqeta is trading at $17.12 per share, or 2.4x forward price-to-sales. To fully understand why you should be careful with MQ, check out our full research report (it’s free).
Xerox (XRX)
Market Cap: $433.3 million
Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ:XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.
Why Do We Think XRX Will Underperform?
- 1.5% annual revenue growth over the last five years was slower than its business services peers
- Earnings per share fell by 50.9% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $3.26 per share, Xerox trades at 10.2x forward P/E. Dive into our free research report to see why there are better opportunities than XRX.
Northern Oil and Gas (NOG)
Market Cap: $2.75 billion
Taking the path less traveled in the oil industry by choosing not to operate its own wells, Northern Oil and Gas (NYSE:NOG) acquires minority stakes in oil and gas wells operated by other companies across major U.S. shale basins.
Why Does NOG Worry Us?
- Efficiency has decreased over the last five years as its EBITDA margin fell by 22.9 percentage points
- High net-debt-to-EBITDA ratio of 8× could force the company to raise capital on unfavorable terms if market conditions deteriorate
Northern Oil and Gas’s stock price of $25.89 implies a valuation ratio of 6.1x forward P/E. Check out our free in-depth research report to learn more about why NOG doesn’t pass our bar.
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.