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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Cars.com (CARS)
Market Cap: $740.4 million
Originally started as a joint venture between several media companies including The Washington Post and The New York Times, Cars.com (NYSE: CARS) is a digital marketplace that connects new and used car buyers and sellers.
Why Does CARS Fall Short?
- Market opportunities are plateauing as its dealer customers were flat over the last two years
- Estimated sales growth of 2% for the next 12 months implies demand will slow from its three-year trend
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
At $12.05 per share, Cars.com trades at 3.5x forward EV/EBITDA. To fully understand why you should be careful with CARS, check out our full research report (it’s free).
Matthews (MATW)
Market Cap: $724.2 million
Originally a death care company, Matthews International (NASDAQ: MATW) is a diversified company offering ceremonial services, brand solutions and industrial technologies.
Why Are We Out on MATW?
- Annual sales declines of 6.5% for the past two years show its products and services struggled to connect with the market
- Earnings per share fell by 14.8% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
Matthews’s stock price of $23.52 implies a valuation ratio of 15.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including MATW in your portfolio.
CTS (CTS)
Market Cap: $1.22 billion
With roots dating back to 1896 and a global manufacturing footprint, CTS (NYSE: CTS) designs and manufactures sensors, connectivity components, and actuators for aerospace, defense, industrial, medical, and transportation markets.
Why Do We Think Twice About CTS?
- Annual sales declines of 5.7% for the past two years show its products and services struggled to connect with the market during this cycle
- Revenue base of $520.9 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Earnings per share have dipped by 4.5% annually over the past two years, which is concerning because stock prices follow EPS over the long term
CTS is trading at $41.55 per share, or 17.3x forward P/E. Dive into our free research report to see why there are better opportunities than CTS.
Stocks We Like More
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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