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.

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

Rush Street Interactive (RSI)

Market Cap: $1.13 billion

Specializing in online casino gaming and sports betting, Rush Street Interactive (NYSE: RSI) is an operator of digital gaming platforms.

Why Is RSI Not Exciting?

1. Estimated sales growth of 12.4% for the next 12 months implies demand will slow from its two-year trend
2. Subpar operating margin of 0.5% constrains its ability to invest in process improvements or effectively respond to new competitive threats
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

Rush Street Interactive is trading at $11.78 per share, or 36.1x forward P/E. To fully understand why you should be careful with RSI, check out our full research report (it’s free).

Ruger (RGR)

Market Cap: $585.2 million

Founded in 1949, Ruger (NYSE: RGR) is an American manufacturer of firearms for the commercial sporting market.

Why Are We Out on RGR?

1. Sales tumbled by 3.9% annually over the last two years, showing consumer trends are working against its favor
2. Earnings per share have contracted by 26.8% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
3. Diminishing returns on capital suggest its earlier profit pools are drying up

At $35.28 per share, Ruger trades at 10.9x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than RGR.

Shoals (SHLS)

Market Cap: $805.8 million

Started in Huntsville, Alabama, Shoals (NASDAQ: SHLS) designs and manufactures products that make solar energy systems work more efficiently.

Why Does SHLS Fall Short?

1. Backlog growth averaged a weak 2.7% over the past two years, suggesting it may need to tweak its product roadmap or go-to-market strategy
2. Revenue growth over the past two years was nullified by the company’s new share issuances as its earnings per share fell by 18.5% annually
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Shoals’s stock price of $4.78 implies a valuation ratio of 11.3x forward P/E. Read our free research report to see why you should think twice about including SHLS in your portfolio.

Stocks We Like More

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