Investors looking for hidden gems should keep an eye on small-cap stocks because they’re frequently overlooked by Wall Street. Many opportunities exist in this part of the market, but it is also a high-risk, high-reward environment due to the lack of reliable analyst price targets.

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.

Wyndham (WH)

Market Cap: $7.10 billion

Established in 1981, Wyndham (NYSE: WH) is a global hotel franchising company with over 9,000 hotels across nearly 95 countries on six continents.

Why Does WH Give Us Pause?

1. Weak revenue per room over the past two years indicates challenges in maintaining pricing power and occupancy rates
2. Anticipated sales growth of 6.7% for the next year implies demand will be shaky
3. Underwhelming 9.4% return on capital reflects management’s difficulties in finding profitable growth opportunities

At $92.26 per share, Wyndham trades at 19.2x forward price-to-earnings. Read our free research report to see why you should think twice about including WH in your portfolio.

Planet Fitness (PLNT)

Market Cap: $7.85 billion

Founded by two brothers who purchased a struggling gym, Planet Fitness (NYSE: PLNT) is a gym franchise that caters to casual fitness users by providing a friendly and inclusive atmosphere.

Why Are We Hesitant About PLNT?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
2. Estimated sales growth of 10.3% for the next 12 months implies demand will slow from its two-year trend
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Planet Fitness is trading at $94.47 per share, or 31.8x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than PLNT.

Merit Medical Systems (MMSI)

Market Cap: $5.79 billion

Founded in 1987, Merit Medical Systems (NASDAQ: MMSI) designs and manufactures medical devices used in interventional, diagnostic, and therapeutic procedures, with a focus on cardiology, radiology, and endoscopy.

Why Are We Wary of MMSI?

1. 6.4% annual revenue growth over the last five years was slower than its healthcare peers
2. Revenue base of $1.36 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
3. ROIC of 3.5% reflects management’s challenges in identifying attractive investment opportunities

Merit Medical Systems’s stock price of $97.56 implies a valuation ratio of 26.3x forward price-to-earnings. If you’re considering MMSI for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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