Investors looking for hidden gems should keep an eye on small-cap stocks because they’re frequently overlooked by Wall Street. Many opportunities exist in this part of the market, but it is also a high-risk, high-reward environment due to the lack of reliable analyst price targets.

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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

Freshpet (FRPT)

Market Cap: $2.70 billion

Standing out from typical processed pet foods, Freshpet (NASDAQ: FRPT) is a pet food company whose product portfolio includes natural meals and treats for dogs and cats.

Why Are We Hesitant About FRPT?

1. Smaller revenue base of $1.08 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Push for growth has led to negative returns on capital, signaling value destruction

At $55.07 per share, Freshpet trades at 41.5x forward P/E. Read our free research report to see why you should think twice about including FRPT in your portfolio.

Terex (TEX)

Market Cap: $3.02 billion

With humble beginnings as a dump truck company, Terex (NYSE: TEX) today manufactures lifting and material handling equipment designed to move and hoist heavy goods and materials.

Why Are We Cautious About TEX?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Incremental sales over the last two years were much less profitable as its earnings per share fell by 19.3% annually while its revenue grew
3. 3.7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

Terex is trading at $46 per share, or 8.8x forward P/E. To fully understand why you should be careful with TEX, check out our full research report (it’s free for active Edge members).

Rogers (ROG)

Market Cap: $1.52 billion

With roots dating back to 1832, making it one of America's oldest continuously operating companies, Rogers (NYSE: ROG) designs and manufactures specialized engineered materials and components used in electric vehicles, telecommunications, renewable energy, and other high-performance applications.

Why Do We Think ROG Will Underperform?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 7% annually over the last two years
2. Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 15.7% annually
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.4 percentage points

Rogers’s stock price of $84.28 implies a valuation ratio of 27.2x forward P/E. If you’re considering ROG for your portfolio, see our FREE research report to learn more.

High-Quality Stocks for All Market Conditions

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