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.
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.
Sleep Number (SNBR)
Market Cap: $245 million
Known for mattresses that can be adjusted with regards to firmness, Sleep Number (NASDAQ: SNBR) manufactures and sells its own brand of bedding products such as mattresses, bed frames, and pillows.
Why Do We Steer Clear of SNBR?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Sleep Number’s stock price of $10.75 implies a valuation ratio of 15.9x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why SNBR doesn’t pass our bar.
Medifast (MED)
Market Cap: $119.8 million
Known for its Optavia program that combines portion-controlled meal replacements with coaching, Medifast (NYSE: MED) has a broad product portfolio of bars, snacks, drinks, and desserts for those looking to lose weight or consume healthier foods.
Why Do We Avoid MED?
- Sales tumbled by 36% annually over the last three years, showing consumer trends are working against its favor
- Smaller revenue base of $429.7 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 90.9% annually, worse than its revenue
At $11.66 per share, Medifast trades at 2.5x forward EV-to-EBITDA. To fully understand why you should be careful with MED, check out our full research report (it’s free).
Strategic Education (STRA)
Market Cap: $1.95 billion
Formed through the merger of Strayer Education and Capella Education in 2018, Strategic Education (NASDAQ: STRA) is a career-focused higher education provider.
Why Should You Dump STRA?
- Performance surrounding its domestic students has lagged its peers
- Earnings per share fell by 5.2% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Free cash flow margin is projected to show no improvement next year
Strategic Education is trading at $83.75 per share, or 13.5x forward P/E. Dive into our free research report to see why there are better opportunities than STRA.
Stocks We Like More
Check out the high-quality names we’ve flagged in our Top 5 Strong Momentum 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-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.
