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.
Choice Hotels (CHH)
Market Cap: $4.67 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 Is CHH Risky?
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Choice Hotels is trading at $101.55 per share, or 14x forward P/E. Dive into our free research report to see why there are better opportunities than CHH.
Gates Industrial Corporation (GTES)
Market Cap: $6.06 billion
Helping create one of the most memorable moments for the iconic “Jurassic Park” film, Gates (NYSE: GTES) offers power transmission and fluid transfer equipment for various industries.
Why Does GTES Worry Us?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Anticipated sales growth of 2.9% for the next year implies demand will be shaky
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $23.32 per share, Gates Industrial Corporation trades at 15.2x forward P/E. Check out our free in-depth research report to learn more about why GTES doesn’t pass our bar.
WEX (WEX)
Market Cap: $5.40 billion
Originally founded in 1983 as Wright Express to serve the fleet card market, WEX (NYSE: WEX) provides payment processing and business solutions across fleet management, employee benefits, and corporate payments sectors.
Why Are We Hesitant About WEX?
- Annual revenue growth of 2.4% over the last two years was below our standards for the financials sector
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 4% annually
WEX’s stock price of $156.90 implies a valuation ratio of 9x forward P/E. To fully understand why you should be careful with WEX, check out our full research report (it’s free).
Stocks We Like More
The market’s up big this year - but there’s a catch. Just 4 stocks account for half the S&P 500’s entire gain. That kind of concentration makes investors nervous, and for good reason. While everyone piles into the same crowded names, smart investors are hunting quality where no one’s looking - and paying a fraction of the price. Check out the high-quality names we’ve flagged in our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.
