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: $2.66 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 Are We Hesitant About MQ?

1. Annual sales declines of 4.7% for the past three years show its products and services struggled to connect with the market
2. Operating margin declined by 4.3 percentage points over the last year as its sales cratered
3. Low free cash flow margin of 9.6% for the last year gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

Marqeta’s stock price of $5.85 implies a valuation ratio of 4.2x forward price-to-sales. Check out our free in-depth research report to learn more about why MQ doesn’t pass our bar.

Transcat (TRNS)

Market Cap: $801.7 million

Serving the pharmaceutical, industrial manufacturing, energy, and chemical process industries, Transcat (NASDAQ: TRNS) provides measurement instruments and supplies.

Why Do We Think Twice About TRNS?

1. Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 1.7 percentage points
2. Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

At $86.03 per share, Transcat trades at 24.9x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including TRNS in your portfolio.

Stewart Information Services (STC)

Market Cap: $1.98 billion

Founded in 1893 during America's westward expansion when property records were often disputed, Stewart Information Services (NYSE: STC) provides title insurance and real estate services, helping homebuyers, sellers, and lenders verify property ownership and protect against title defects.

Why Does STC Give Us Pause?

1. 1.3% annualized net premiums earned growth over the last two years lagged behind its insurance peers
2. Earnings per share fell by 1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
3. Annual book value per share growth of 1.6% over the last two years was below our standards for the insurance sector

Stewart Information Services is trading at $70.58 per share, or 1.3x forward P/B. Dive into our free research report to see why there are better opportunities than STC.

Stocks We Like More

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