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.

Shake Shack (SHAK)

Market Cap: $5.41 billion

Started as a hot dog cart in New York City's Madison Square Park, Shake Shack (NYSE: SHAK) is a fast-food restaurant known for its burgers and milkshakes.

Why Does SHAK Give Us Pause?

1. Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
2. Low free cash flow margin of 1.6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
3. Negative returns on capital show that some of its growth strategies have backfired

Shake Shack is trading at $134.51 per share, or 101.2x forward P/E. Dive into our free research report to see why there are better opportunities than SHAK.

Dine Brands (DIN)

Market Cap: $392.8 million

Operating a franchise model, Dine Brands (NYSE: DIN) is a casual restaurant chain that owns the Applebee’s and IHOP banners.

Why Should You Sell DIN?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Sales over the last six years were less profitable as its earnings per share fell by 10.1% annually while its revenue was flat
3. High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens

Dine Brands’s stock price of $25.20 implies a valuation ratio of 4.9x forward P/E. Check out our free in-depth research report to learn more about why DIN doesn’t pass our bar.

Lovesac (LOVE)

Market Cap: $281.2 million

Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.

Why Do We Think Twice About LOVE?

1. Annual revenue growth of 1.7% over the last two years was below our standards for the consumer discretionary sector
2. Poor free cash flow margin of 1% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Eroding returns on capital suggest its historical profit centers are aging

At $19.50 per share, Lovesac trades at 5.6x forward EV-to-EBITDA. To fully understand why you should be careful with LOVE, check out our full research report (it’s free).

Stocks We Like More

Trump’s April 2024 tariff bombshell triggered a massive market selloff, but stocks have since staged an impressive recovery, leaving those who panic sold on the sidelines.

Take advantage of the rebound by checking out 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 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-small-cap company Comfort Systems (+782% 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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