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.
These trade-offs can cause headaches for even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Five Below (FIVE)
Market Cap: $8.38 billion
Often facilitating a treasure hunt shopping experience, Five Below (NASDAQ: FIVE) is an American discount retailer that sells a variety of products from mobile phone cases to candy to sports equipment for largely $5 or less.
Why Is FIVE Not Exciting?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Subscale operations are evident in its revenue base of $4.23 billion, meaning it has fewer distribution channels than its larger rivals
- Underwhelming 10.8% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its decreasing returns suggest its historical profit centers are aging
Five Below’s stock price of $153.04 implies a valuation ratio of 30.4x forward P/E. Check out our free in-depth research report to learn more about why FIVE doesn’t pass our bar.
Nature's Sunshine (NATR)
Market Cap: $252.2 million
Started on a kitchen table in Utah, Nature’s Sunshine (NASDAQ: NATR) manufactures and sells nutritional and personal care products.
Why Are We Wary of NATR?
- Sales stagnated over the last three years and signal the need for new growth strategies
- Revenue base of $460.8 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Earnings per share were flat over the last three years and fell short of the peer group average
Nature's Sunshine is trading at $14.39 per share, or 19.1x forward P/E. If you’re considering NATR for your portfolio, see our FREE research report to learn more.
Carriage Services (CSV)
Market Cap: $692.8 million
Established in 1991, Carriage Services (NYSE: CSV) is a provider of funeral and cemetery services in the United States.
Why Are We Cautious About CSV?
- Muted 4.3% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Projected sales growth of 3.9% for the next 12 months suggests sluggish demand
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.3 percentage points
At $44.53 per share, Carriage Services trades at 13.4x forward P/E. To fully understand why you should be careful with CSV, check out our full research report (it’s free for active Edge members).
High-Quality Stocks for All Market Conditions
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Don’t let fear keep you from great opportunities and take a look at Top 5 Growth Stocks for this month. 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).
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