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.
Nextdoor (KIND)
Market Cap: $637.4 million
Helping residents figure out what's happening on their block in real time, Nextdoor (NYSE: KIND) is a social network that connects neighbors with each other and with local businesses.
Why Are We Cautious About KIND?
- Preference for prioritizing user growth over monetization has led to 1.1% annual drops in its average revenue per user
- Historical EBITDA losses point to an inefficient cost structure
- Cash-burning history makes us doubt the long-term viability of its business model
Nextdoor’s stock price of $1.62 implies a valuation ratio of 2.9x forward price-to-gross profit. To fully understand why you should be careful with KIND, check out our full research report (it’s free).
Oshkosh (OSK)
Market Cap: $6.18 billion
Oshkosh (NYSE: OSK) manufactures specialty vehicles for the defense, fire, emergency, and commercial industry, operating various brand subsidiaries within each industry.
Why Do We Think Twice About OSK?
- Average backlog growth of 7.5% over the past two years was mediocre and suggests fewer customers signed long-term contracts
- Forecasted revenue decline of 1.8% for the upcoming 12 months implies demand will fall off a cliff
- Free cash flow margin dropped by 8.4 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Oshkosh is trading at $95.70 per share, or 9x forward price-to-earnings. Check out our free in-depth research report to learn more about why OSK doesn’t pass our bar.
GoodRx (GDRX)
Market Cap: $1.70 billion
Started in 2011 to tackle the problem of high prescription drug costs in America, GoodRx (NASDAQ: GDRX) operates a digital platform that helps consumers find lower prices on prescription medications through price comparison tools and discount codes.
Why Do We Avoid GDRX?
- Sales trends were unexciting over the last two years as its 1.7% annual growth was below the typical healthcare company
- Modest revenue base of $792.3 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Push for growth has led to negative returns on capital, signaling value destruction
At $4.52 per share, GoodRx trades at 10.6x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than GDRX.
Stocks We Like More
The Trump trade may have passed, but rates are still dropping and inflation is still cooling. Opportunities are ripe for those ready to act - and we’re here to help you pick them.
Get started by checking out our 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 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Axon (+711% five-year return). Find your next big winner with StockStory today for free.
