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.

Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

The RealReal (REAL)

Market Cap: $1.22 billion

Founded by consignment store aficionado Julie Wainwright, The RealReal (NASDAQ: REAL) is an online marketplace for buying and selling secondhand luxury goods.

Why Do We Think Twice About REAL?

1. Lackluster 4.1% annual revenue growth over the last three years indicates the company is losing ground to competitors
2. Decision to emphasize platform growth over monetization has contributed to 11.7% annual declines in its average revenue per user
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

The RealReal is trading at $10.75 per share, or 35.1x forward EV/EBITDA. To fully understand why you should be careful with REAL, check out our full research report (it’s free).

Dillard's (DDS)

Market Cap: $9.59 billion

With stores located largely in the Southern and Western US, Dillard’s (NYSE: DDS) is a department store chain that sells clothing, cosmetics, accessories, and home goods.

Why Is DDS Not Exciting?

1. Dearth of new stores suggests management is prioritizing the optimization of its existing locations over growth
2. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
3. Projected sales decline of 2.1% for the next 12 months points to an even tougher demand environment ahead

At $613.76 per share, Dillard's trades at 23.2x forward P/E. Check out our free in-depth research report to learn more about why DDS doesn’t pass our bar.

Covenant Logistics (CVLG)

Market Cap: $541.9 million

Started with 25 trucks and 50 trailers, Covenant Logistics (NASDAQ: CVLG) is a provider of expedited long haul freight services, offering a range of logistics solutions.

Why Should You Dump CVLG?

1. Sales stagnated over the last two years and signal the need for new growth strategies
2. Free cash flow margin shrank by 20.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Waning returns on capital imply its previous profit engines are losing steam

Covenant Logistics’s stock price of $21.66 implies a valuation ratio of 10.6x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including CVLG in your portfolio.

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