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.

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.

Kontoor Brands (KTB)

Market Cap: $3.47 billion

Founded in 2019 after separating from VF Corporation, Kontoor Brands (NYSE: KTB) is a clothing company known for its high-quality denim products.

Why Is KTB Risky?

1. Constant currency revenue growth has disappointed over the past two years and shows demand was soft
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Kontoor Brands is trading at $62.35 per share, or 10.5x forward P/E. Read our free research report to see why you should think twice about including KTB in your portfolio.

Frost Bank (CFR)

Market Cap: $8.99 billion

Tracing its roots back to 1868 when it was founded during Texas's post-Civil War reconstruction era, Cullen/Frost Bankers (NYSE: CFR) operates Frost Bank, a Texas-based financial institution providing commercial and consumer banking, wealth management, and insurance services.

Why Is CFR Not Exciting?

1. Sales trends were unexciting over the last two years as its 6.1% annual growth was below the typical banking company
2. Performance over the past two years shows its incremental sales were less profitable, as its 2.2% annual earnings per share growth trailed its revenue gains
3. Forecasted tangible book value per share decline of 3.6% for the upcoming 12 months implies profitability will deteriorate significantly

Frost Bank’s stock price of $140.54 implies a valuation ratio of 1.8x forward P/B. Dive into our free research report to see why there are better opportunities than CFR.

PROG (PRG)

Market Cap: $1.29 billion

Evolving from its origins as Aaron's, Inc. before rebranding in 2020, PROG Holdings (NYSE: PRG) provides alternative payment solutions including lease-to-own options and second-look credit products for consumers who may not qualify for traditional financing.

Why Do We Pass on PRG?

1. Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
2. Earnings per share fell by 6.2% annually over the last five years while its revenue was flat, showing each sale was less profitable
3. Annual tangible book value per share declines of 12.9% for the past five years show its capital management struggled during this cycle

At $32.66 per share, PROG trades at 9.7x forward P/E. Read our free research report to see why you should think twice about including PRG in your portfolio.

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