Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.
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.
Soho House (SHCO)
Market Cap: $1.73 billion
Boasting fancy locations in hubs such as NYC and Miami, Soho House (NYSE: SHCO) is a global hospitality brand offering exclusive private member clubs, hotels, and restaurants.
Why Are We Hesitant About SHCO?
- Number of members has disappointed over the past two years, indicating weak demand for its offerings
- Negative free cash flow raises questions about the return timeline for its investments
- High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Soho House is trading at $8.86 per share, or 9.7x forward EV-to-EBITDA. If you’re considering SHCO for your portfolio, see our FREE research report to learn more.
GXO Logistics (GXO)
Market Cap: $6.03 billion
With notable customers such as Nike and Apple, GXO (NYSE: GXO) manages outsourced supply chains and warehousing for various companies.
Why Does GXO Worry Us?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 2.2% annually
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $52.79 per share, GXO Logistics trades at 18.9x forward P/E. Check out our free in-depth research report to learn more about why GXO doesn’t pass our bar.
Align Technology (ALGN)
Market Cap: $9.05 billion
Pioneering an alternative to traditional metal braces with nearly invisible plastic aligners, Align Technology (NASDAQ: ALGN) designs and manufactures Invisalign clear aligners, iTero intraoral scanners, and dental CAD/CAM software for orthodontic and restorative treatments.
Why Are We Cautious About ALGN?
- Underwhelming clear aligner shipments over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 7.5 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
Align Technology’s stock price of $125.68 implies a valuation ratio of 11.5x forward P/E. Dive into our free research report to see why there are better opportunities than ALGN.
High-Quality Stocks for All Market Conditions
Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.
The smart money is already positioning for the next leg up. Don’t miss out on the recovery - check out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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