The Russell 2000 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.

Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.

Q2 Holdings (QTWO)

Market Cap: $4.59 billion

Founded in 2004 by Hank Seale, Q2 (NYSE:QTWO) offers software-as-a-service that enables small banks to provide online banking and consumer lending services to their clients.

Why Are We Hesitant About QTWO?

1. 11.7% annual revenue growth over the last three years was slower than its software peers

2. Bad unit economics and steep infrastructure costs are reflected in its gross margin of 50.9%, one of the worst among software companies

3. Suboptimal cost structure is highlighted by its history of operating losses

At $70.01 per share, Q2 Holdings trades at 6.3x forward price-to-sales. If you’re considering QTWO for your portfolio, see our FREE research report to learn more .

Laureate Education (LAUR)

Market Cap: $3.06 billion

Founded in 1998 by Douglas L. Becker and based in Miami, Laureate Education (NASDAQ:LAUR) is a global network of higher education institutions.

Why Does LAUR Fall Short?

1. Demand for its offerings was relatively low as its number of enrolled students has underwhelmed

2. Demand is forecasted to shrink as its estimated sales for the next 12 months are flat

3. Low returns on capital reflect management’s struggle to allocate funds effectively

Laureate Education is trading at $19.50 per share, or 14.5x forward price-to-earnings. Check out our free in-depth research report to learn more about why LAUR doesn’t pass our bar .

Sphere Entertainment (SPHR)

Market Cap: $1.03 billion

Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE:SPHR) hosts live entertainment events and distributes content across various media platforms.

Why Are We Out on SPHR?

1. Annual revenue growth of 1.7% over the last five years was below our standards for the consumer discretionary sector

2. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value

3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Sphere Entertainment’s stock price of $27.40 implies a valuation ratio of 22.1x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SPHR in your portfolio, it’s free .