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.
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.
Choice Hotels (CHH)
Market Cap: $5.29 billion
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE: CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
Why Do We Steer Clear of CHH?
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- Sales are projected to tank by 1.5% over the next 12 months as demand evaporates
- Waning returns on capital imply its previous profit engines are losing steam
Choice Hotels’s stock price of $115.12 implies a valuation ratio of 16.2x forward P/E. Check out our free in-depth research report to learn more about why CHH doesn’t pass our bar.
Global Industrial (GIC)
Market Cap: $1.47 billion
Formerly known as Systemax, Global Industrial (NYSE: GIC) distributes industrial and commercial products to businesses and institutions.
Why Are We Out on GIC?
- Muted 6.9% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Earnings per share fell by 2.3% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $38.36 per share, Global Industrial trades at 22.2x forward P/E. If you’re considering GIC for your portfolio, see our FREE research report to learn more.
First Advantage (FA)
Market Cap: $2.83 billion
Processing approximately 100 million background checks annually across more than 200 countries and territories, First Advantage (NASDAQ: FA) provides employment background screening, identity verification, and compliance solutions to help companies manage hiring risks.
Why Are We Wary of FA?
- Earnings per share have contracted by 9.3% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
- 16.5 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
First Advantage is trading at $15.96 per share, or 15.8x forward P/E. To fully understand why you should be careful with FA, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.
The smart money is already positioning for the next leg up. Don’t miss out on the recovery - check out our Top 6 Stocks for this week. 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).
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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