Small-cap stocks in the Russell 2000 (^RUT) can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.
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.
La-Z-Boy (LZB)
Market Cap: $1.71 billion
The prized possession of every mancave, La-Z-Boy (NYSE: LZB) is a furniture company specializing in recliners, sofas, and seats.
Why Is LZB Risky?
- Annual revenue declines of 8% over the last two years indicate problems with its market positioning
- Estimated sales growth of 1.8% for the next 12 months is soft and implies weaker demand
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
La-Z-Boy is trading at $41.31 per share, or 12.3x forward P/E. Dive into our free research report to see why there are better opportunities than LZB.
The Real Brokerage (REAX)
Market Cap: $899.1 million
Founded in Toronto, Canada in 2014, The Real Brokerage (NASDAQ: REAX) is a technology-driven real estate brokerage firm combining a tech-centric model with an agent-centric philosophy.
Why Are We Wary of REAX?
- Poor expense management has led to operating losses
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 3.8% annually while its revenue grew
- Poor free cash flow margin of 3.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
The Real Brokerage’s stock price of $4.49 implies a valuation ratio of 18.1x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including REAX in your portfolio.
European Wax Center (EWCZ)
Market Cap: $145.5 million
Founded by two siblings, European Wax Center (NASDAQ: EWCZ) is a beauty and waxing salon chain specializing in professional wax services and skincare products.
Why Does EWCZ Worry Us?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
- Sales are projected to tank by 2.4% over the next 12 months as demand evaporates
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $3.42 per share, European Wax Center trades at 9.3x forward P/E. To fully understand why you should be careful with EWCZ, check out our full research report (it’s free).
Stocks We Like More
Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.
While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.
