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.

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 swipe left on and some alternatives you should look into instead.

H&R Block (HRB)

Market Cap: $3.93 billion

Founded in 1955 by brothers Henry W. Bloch and Richard A. Bloch, H&R Block (NYSE: HRB) is a tax preparation company offering professional tax assistance and financial solutions to individuals and small businesses.

Why Do We Pass on HRB?

1. Muted 5.6% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
2. Poor free cash flow margin of 16.3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

H&R Block is trading at $31.33 per share, or 1x forward price-to-sales. Read our free research report to see why you should think twice about including HRB in your portfolio.

Ameresco (AMRC)

Market Cap: $1.47 billion

Having played a role in upgrading the energy solutions of Alcatraz Island, Ameresco (NYSE: AMRC) provides energy and renewable energy solutions for various sectors.

Why Does AMRC Give Us Pause?

1. Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 5.4% annually
2. Cash-burning history makes us doubt the long-term viability of its business model
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

Ameresco’s stock price of $27.76 implies a valuation ratio of 24.1x forward P/E. To fully understand why you should be careful with AMRC, check out our full research report (it’s free).

Valley National Bank (VLY)

Market Cap: $7.63 billion

Tracing its roots back to 1927 during the economic boom before the Great Depression, Valley National Bancorp (NASDAQGS:VLY) operates Valley National Bank, providing commercial, consumer, and wealth management banking services across several states.

Why Do We Think VLY Will Underperform?

1. 9.6% annual net interest income growth over the last five years was slower than its banking peers
2. Inferior net interest margin of 3% means it must compensate for lower profitability through increased loan originations
3. Incremental sales over the last five years were less profitable as its 1.5% annual earnings per share growth lagged its revenue gains

At $13.75 per share, Valley National Bank trades at 0.9x forward P/B. Dive into our free research report to see why there are better opportunities than VLY.

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