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.
The high-risk, high-reward nature of the Russell 2000 makes stock selection critical, and we’re here to guide you toward the right ones. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
American Eagle (AEO)
Market Cap: $2.97 billion
With a heavy focus on denim, American Eagle Outfitters (NYSE:AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.
Why Is AEO Not Exciting?
- Muted 3.9% annual revenue growth over the last six years shows its demand lagged behind its consumer retail peers
- Earnings per share fell by 5.3% annually over the last six years while its revenue grew, showing its incremental sales were much less profitable
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up
American Eagle’s stock price of $17.29 implies a valuation ratio of 12.5x forward P/E. Check out our free in-depth research report to learn more about why AEO doesn’t pass our bar.
Trinity (TRN)
Market Cap: $2.04 billion
Operating under the trade name TrinityRail, Trinity (NYSE:TRN) is a provider of railcar products and services in North America.
Why Do We Pass on TRN?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.2% annually over the last five years
- Estimated sales for the next 12 months are flat and imply a softer demand environment
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 23.4 percentage points
At $25.50 per share, Trinity trades at 14.2x forward P/E. If you’re considering TRN for your portfolio, see our FREE research report to learn more.
Tri Pointe Homes (TPH)
Market Cap: $2.63 billion
Established in 2009 in California, Tri Pointe Homes (NYSE:TPH) is a United States homebuilder recognized for its innovative and sustainable approach to creating premium, life-enhancing homes.
Why Are We Out on TPH?
- Demand cratered as it couldn’t win new orders over the past two years, leading to an average 11.2% decline in its backlog
- Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
- Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
Tri Pointe Homes is trading at $30.65 per share, or 13.3x forward P/E. Read our free research report to see why you should think twice about including TPH in your portfolio.
Stocks We Like More
Your portfolio can’t afford to be based on yesterday’s story. The risk in a handful of heavily crowded stocks is rising daily.
The names generating the next wave of massive growth are right here in 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 244% over the last five years (as of June 30, 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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