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.

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.

Carter's (CRI)

Market Cap: $1.38 billion

Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE: CRI) is an American designer and marketer of children's apparel.

Why Do We Think CRI Will Underperform?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
2. Low free cash flow margin of 6.5% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Carter's is trading at $38.00 per share, or 14.6x forward P/E. To fully understand why you should be careful with CRI, check out our full research report (it’s free).

Plug Power (PLUG)

Market Cap: $2.55 billion

Powering forklifts for Walmart’s distribution centers, Plug Power (NASDAQ: PLUG) provides hydrogen fuel cells used to power electric motors.

Why Are We Hesitant About PLUG?

1. Annual sales declines of 12.8% for the past two years show its products and services struggled to connect with the market during this cycle
2. Cash-burning history makes us doubt the long-term viability of its business model
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $1.82 per share, Plug Power trades at 2.9x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PLUG.

LendingTree (TREE)

Market Cap: $587.3 million

Using the same comparison model that revolutionized travel booking, LendingTree (NASDAQ: TREE) operates an online platform that connects consumers with financial service providers across mortgages, personal loans, credit cards, insurance, and other financial products.

Why Are We Out on TREE?

1. Sales were flat over the last three years, indicating it’s failed to expand its business
2. Projected sales growth of 8.5% for the next 12 months suggests sluggish demand
3. Expensive marketing campaigns hurt its profitability and make us wonder what would happen if it let up on the gas

LendingTree’s stock price of $43.29 implies a valuation ratio of 7x forward EV/EBITDA. Check out our free in-depth research report to learn more about why TREE doesn’t pass our bar.

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