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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.

Sabre (SABR)

Market Cap: $1.29 billion

Originally a division of American Airlines, Sabre (NASDAQ: SABR) is a technology provider for the global travel and tourism industry.

Why Do We Avoid SABR?

1. Performance surrounding its total bookings has lagged its peers
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.8% for the last two years
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Sabre’s stock price of $3.37 implies a valuation ratio of 18.2x forward price-to-earnings. Read our free research report to see why you should think twice about including SABR in your portfolio.

Array (ARRY)

Market Cap: $924.2 million

Going public in October 2020, Array (NASDAQ: ARRY) is a global manufacturer of ground-mounting tracking systems for utility and distributed generation solar energy projects.

Why Should You Dump ARRY?

1. Declining unit sales over the past two years imply it may need to invest in improvements to get back on track
2. Negative free cash flow raises questions about the return timeline for its investments
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

At $6.09 per share, Array trades at 7.8x forward price-to-earnings. If you’re considering ARRY for your portfolio, see our FREE research report to learn more.

Encompass Health (EHC)

Market Cap: $9.67 billion

With a network of 161 specialized facilities across 37 states and Puerto Rico, Encompass Health (NYSE: EHC) operates inpatient rehabilitation hospitals that help patients recover from strokes, hip fractures, and other debilitating conditions.

Why Are We Wary of EHC?

1. Expenses have increased as a percentage of revenue over the last two years as its adjusted operating margin fell by 4.5 percentage points
2. Free cash flow margin shrank by 2.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

Encompass Health is trading at $96.38 per share, or 20.2x forward price-to-earnings. Check out our free in-depth research report to learn more about why EHC doesn’t pass our bar.

Stocks We Like More

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Take advantage of the rebound 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.