Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.
The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Choice Hotels (CHH)
Market Cap: $4.59 billion
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE:CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
Why Do We Steer Clear of CHH?
- Revenue per room has underperformed over the past two years, suggesting it may need to develop new facilities
- Low free cash flow margin of 9.4% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Choice Hotels’s stock price of $100.59 implies a valuation ratio of 14.3x forward P/E. To fully understand why you should be careful with CHH, check out our full research report (it’s free).
Ryder (R)
Market Cap: $7.75 billion
As one of the first companies to introduce the idea of leasing trucks, Ryder (NYSE:R) provides rental vehicles to businesses and delivers packages directly to homes or businesses.
Why Is R Not Exciting?
- The company has faced growth challenges as its 3.7% annual revenue increases over the last two years fell short of other industrials companies
- Flat earnings per share over the last two years underperformed the sector average
- Cash-burning history makes us doubt the long-term viability of its business model
Ryder is trading at $197.61 per share, or 14.2x forward P/E. Check out our free in-depth research report to learn more about why R doesn’t pass our bar.
ESAB (ESAB)
Market Cap: $5.58 billion
Having played a significant role in the construction of the iconic Sydney Opera House, ESAB (NYSE:ESAB) manufactures and sells welding and cutting equipment for numerous industries.
Why Does ESAB Fall Short?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 3.2 percentage points
At $91.60 per share, ESAB trades at 16.3x forward P/E. Read our free research report to see why you should think twice about including ESAB in your portfolio.
Stocks We Like More
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
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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.