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.

Interface (TILE)

Market Cap: $1.59 billion

Pioneering carbon-neutral flooring since its founding in 1973, Interface (NASDAQ: TILE) is a global manufacturer of modular carpet tiles, luxury vinyl tile (LVT), and rubber flooring that specializes in carbon-neutral and sustainable flooring solutions.

Why Are We Hesitant About TILE?

1. 1.8% annual revenue growth over the last five years was slower than its business services peers
2. Earnings growth underperformed the sector average over the last five years as its EPS grew by just 1.9% annually
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Interface’s stock price of $27.26 implies a valuation ratio of 15x forward EV-to-EBITDA. To fully understand why you should be careful with TILE, check out our full research report (it’s free).

Root (ROOT)

Market Cap: $1.41 billion

Pioneering a data-driven approach that rewards good driving habits, Root (NASDAQ: ROOT) is a technology-driven auto insurance company that uses mobile apps to acquire customers and data science to price policies based on individual driving behavior.

Why Is ROOT Not Exciting?

1. Book value per share tumbled by 158% annually over the last five years, showing insurance sector trends are working against its favor during this cycle
2. Push for growth has led to negative returns on capital, signaling value destruction

At $90.64 per share, Root trades at 4.4x forward P/B. If you’re considering ROOT for your portfolio, see our FREE research report to learn more.

Stellar Bancorp (STEL)

Market Cap: $1.59 billion

Created through strategic mergers to serve the growing Texas business community, Stellar Bancorp (NYSE: STEL) is a Texas bank holding company that provides commercial banking services primarily to small and medium-sized businesses and professionals.

Why Are We Out on STEL?

1. Sales stagnated over the last two years and signal the need for new growth strategies
2. Overall productivity is expected to decrease over the next year as Wall Street thinks its efficiency ratio will degrade by 5.7 percentage points
3. Loan losses and capital returns have eroded its tangible book value per share this cycle as its tangible book value per share declined by 3.7% annually over the last five years

Stellar Bancorp is trading at $30.94 per share, or 1x forward P/B. Check out our free in-depth research report to learn more about why STEL doesn’t pass our bar.

High-Quality Stocks for All Market Conditions

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