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.

Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

Lucky Strike (LUCK)

Market Cap: $1.27 billion

Born from the transformation of traditional bowling alleys into modern entertainment destinations, Lucky Strike (NYSE: LUCK) operates bowling alleys and other entertainment venues with upscale amenities, arcade games, and food and beverage services across North America.

Why Is LUCK Risky?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
2. Negative free cash flow raises questions about the return timeline for its investments
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Lucky Strike’s stock price of $9.09 implies a valuation ratio of 30.3x forward P/E. Dive into our free research report to see why there are better opportunities than LUCK.

Collegium Pharmaceutical (COLL)

Market Cap: $934.4 million

Pioneering abuse-deterrent technology in a field plagued by addiction concerns, Collegium Pharmaceutical (NASDAQ: COLL) develops and markets specialty medications for treating moderate to severe pain, including abuse-deterrent opioid formulations.

Why Does COLL Fall Short?

1. Modest revenue base of $664.3 million gives it less fixed cost leverage and fewer distribution channels than larger companies
2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6.5 percentage points
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Collegium Pharmaceutical is trading at $29.07 per share, or 4x forward P/E. To fully understand why you should be careful with COLL, check out our full research report (it’s free).

IAC (IAC)

Market Cap: $3.11 billion

Originally known as InterActiveCorp and built through Barry Diller's strategic acquisitions since the 1990s, IAC (NASDAQ: IAC) operates a portfolio of category-leading digital businesses including Dotdash Meredith, Angi, and Care.com, focusing on digital publishing, home services, and caregiving platforms.

Why Do We Avoid IAC?

1. Annual sales declines of 24.7% for the past two years show its products and services struggled to connect with the market during this cycle
2. Historically negative EPS casts doubt for cautious investors and clouds its long-term earnings prospects
3. Push for growth has led to negative returns on capital, signaling value destruction

At $38.89 per share, IAC trades at 31.3x forward P/E. Check out our free in-depth research report to learn more about why IAC doesn’t pass our bar.

Stocks We Like More

Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.

While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 176% over the last five years.

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-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today for free.