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.

Soho House (SHCO)

Market Cap: $1.26 billion

Boasting fancy locations in hubs such as NYC and Miami, Soho House (NYSE: SHCO) is a global hospitality brand offering exclusive private member clubs, hotels, and restaurants.

Why Do We Steer Clear of SHCO?

1. Performance surrounding its members has lagged its peers
2. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
3. 16× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Soho House is trading at $6.46 per share, or 7x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SHCO in your portfolio.

Enact Holdings (ACT)

Market Cap: $5.26 billion

Playing a critical role in helping first-time homebuyers access the housing market, Enact Holdings (NASDAQ: ACT) provides private mortgage insurance that enables lenders to offer home loans with lower down payments while protecting against borrower defaults.

Why Should You Sell ACT?

1. Net premiums earned were flat over the last four years, indicating it’s failed to expand this cycle
2. Costs have risen faster than its revenue over the last two years, causing its combined ratio to worsen by 16.7 percentage points
3. Performance over the past two years shows its incremental sales were less profitable, as its 2.4% annual earnings per share growth trailed its revenue gains

At $35.03 per share, Enact Holdings trades at 1x forward P/B. Dive into our free research report to see why there are better opportunities than ACT.

Brookline Bancorp (BRKL)

Market Cap: $960.5 million

Founded in 1871 and operating through three subsidiary banks across three states, Brookline Bancorp (NASDAQ: BRKL) is a multi-bank holding company that provides commercial, business, and retail banking services to small and mid-sized businesses and individuals in New England and New York.

Why Are We Wary of BRKL?

1. 6.7% annual net interest income growth over the last five years was slower than its bank peers
2. Net interest margin dropped by 27 basis points (100 basis points = 1 percentage point) over the last two years, implying the company’s spreads fell as competitors entered the market
3. Sales over the last two years were less profitable as its earnings per share fell by 16.1% annually while its revenue was flat

Brookline Bancorp’s stock price of $10.78 implies a valuation ratio of 0.5x forward P/B. To fully understand why you should be careful with BRKL, check out our full research report (it’s free).

High-Quality Stocks for All Market Conditions

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