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.
Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here are three Russell 2000 stocks to avoid and better alternatives to consider.
8x8 (EGHT)
Market Cap: $329.3 million
Named after its founding year (1987) with "8x8" representing binary code for communications, 8x8 (NASDAQ:EGHT) provides cloud-based contact center and unified communications solutions that enable businesses to manage customer interactions and internal communications through a single platform.
Why Do We Steer Clear of EGHT?
- Average billings growth of 1.3% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.2%
- Operating margin didn’t move over the last year, showing it couldn’t increase its efficiency
8x8’s stock price of $2.26 implies a valuation ratio of 0.4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than EGHT.
Inspired (INSE)
Market Cap: $121.5 million
Specializing in digital casino gaming, Inspired (NASDAQ:INSE) is a provider of gaming hardware, virtual sports platforms, and server-based gaming systems.
Why Do We Pass on INSE?
- Lackluster 7.5% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Low free cash flow margin of 6.2% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Inspired is trading at $4.60 per share, or 20x forward P/E. Check out our free in-depth research report to learn more about why INSE doesn’t pass our bar.
Funko (FNKO)
Market Cap: $305.2 million
Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ:FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.
Why Do We Avoid FNKO?
- 2% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.6% for the last two years
- Returns on capital are growing as management invests in more worthwhile ventures
At $5.50 per share, Funko trades at 33.3x forward P/E. If you’re considering FNKO for your portfolio, see our FREE research report to learn more.
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-micro-cap company Tecnoglass (+1,552% between June 2020 and June 2025). Find your next big winner with StockStory today.