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The Russell 2000 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 avoid and better alternatives to consider.

Varonis (VRNS)

Market Cap: $4.32 billion

Founded by a duo of former Israeli Defense Forces cyber warfare engineers, Varonis (NASDAQ:VRNS) offers software-as-service that helps customers protect data from cyber threats and gain visibility into how enterprise data is being used.

Why Do We Think Twice About VRNS?

1. Annual revenue growth of 12.2% over the last three years was below our standards for the software sector

2. Suboptimal cost structure is highlighted by its history of operating losses

3. High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate

At $38.31 per share, Varonis trades at 6.9x forward price-to-sales. To fully understand why you should be careful with VRNS, check out our full research report (it’s free).

Progyny (PGNY)

Market Cap: $1.93 billion

Pioneering a data-driven approach to family building that has achieved an industry-leading patient satisfaction score of +80, Progyny (NASDAQ:PGNY) provides comprehensive fertility and family building benefits solutions to employers, helping employees access quality fertility treatments and support services.

Why Does PGNY Give Us Pause?

1. Modest revenue base of $1.17 billion gives it less fixed cost leverage and fewer distribution channels than larger companies

2. Estimated sales growth of 3.9% for the next 12 months implies demand will slow from its two-year trend

3. Push for growth has led to negative returns on capital, signaling value destruction

Progyny’s stock price of $22.16 implies a valuation ratio of 13.9x forward price-to-earnings. If you’re considering PGNY for your portfolio, see our FREE research report to learn more.

CoreCivic (CXW)

Market Cap: $2.11 billion

Originally founded in 1983 as the first private prison company in the United States, CoreCivic (NYSE:CXW) operates correctional facilities, detention centers, and residential reentry programs for government agencies across the United States.

Why Do We Avoid CXW?

1. Performance surrounding its average available beds has lagged its peers

2. Earnings per share fell by 22.8% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable

3. Free cash flow margin shrank by 8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive