The Russell 2000 (^RUT) is packed with potential breakout stocks, thanks to its focus on smaller companies with high growth potential. However, smaller size also means these businesses often lack the resilience and financial flexibility of large-cap firms, making careful selection crucial.

Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.

Compass (COMP)

Market Cap: $4.30 billion

Fueled by its mission to replace the "paper-driven, antiquated workflow" of buying a house, Compass $(COMP)$ is a digital-first company operating a residential real estate brokerage in the United States.

Why Are We Hesitant About COMP?

1. Number of principal agents has disappointed over the past two years, indicating weak demand for its offerings
2. Suboptimal cost structure is highlighted by its history of operating margin losses
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

Compass is trading at $8.30 per share, or 18.5x forward P/E. Check out our free in-depth research report to learn more about why COMP doesn’t pass our bar.

Frontdoor (FTDR)

Market Cap: $4.10 billion

Established in 2018 as a spin-off from ServiceMaster Global Holdings, Frontdoor $(FTDR)$ is a provider of home warranty and service plans.

Why Are We Wary of FTDR?

1. Annual revenue growth of 6.8% over the last five years was below our standards for the consumer discretionary sector
2. Demand for its offerings was relatively low as its number of home service plans has underwhelmed
3. Projected sales growth of 8.6% for the next 12 months suggests sluggish demand

Frontdoor’s stock price of $57.39 implies a valuation ratio of 15.6x forward P/E. To fully understand why you should be careful with FTDR, check out our full research report (it’s free).

Guardant Health (GH)

Market Cap: $6.28 billion

Pioneering the field of "liquid biopsy" with technology that can identify cancer-specific genetic mutations from a simple blood draw, Guardant Health (NASDAQ:GH) develops blood tests that detect and monitor cancer by analyzing tumor DNA in the bloodstream, helping doctors make treatment decisions without invasive biopsies.

Why Is GH Not Exciting?

1. Earnings per share fell by 19.6% annually over the last five years while its revenue grew, partly because it diluted shareholders
2. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

At $50.52 per share, Guardant Health trades at 6.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than GH.

Stocks We Like More

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