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.

Planet Fitness (PLNT)

Market Cap: $8.8 billion

Founded by two brothers who purchased a struggling gym, Planet Fitness (NYSE: PLNT) is a gym franchise that caters to casual fitness users by providing a friendly and inclusive atmosphere.

Why Are We Wary of PLNT?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
2. Projected 3.5 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

At $103.75 per share, Planet Fitness trades at 33.1x forward P/E. Check out our free in-depth research report to learn more about why PLNT doesn’t pass our bar.

Standex (SXI)

Market Cap: $2.53 billion

Holding over 500 patents globally, Standex (NYSE: SXI) is a manufacturer and distributor of industrial components for various sectors.

Why Is SXI Not Exciting?

1. Muted 3.3% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
2. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 7.8% annually
3. 4.2 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

Standex’s stock price of $209.41 implies a valuation ratio of 24.4x forward P/E. Dive into our free research report to see why there are better opportunities than SXI.

OceanFirst Financial (OCFC)

Market Cap: $1.04 billion

Tracing its roots back to 1902 when it began serving coastal New Jersey communities, OceanFirst Financial (NASDAQ: OCFC) operates as a regional bank holding company that provides commercial and consumer banking services primarily in New Jersey and surrounding metropolitan areas.

Why Do We Pass on OCFC?

1. Muted 1.9% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
2. 41.3 basis point (100 basis points = 1 percentage point) decline in its net interest margin over the last two years reflects the firm’s willingness to accept lower profitability to defend its market position
3. Earnings per share fell by 5.1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable

OceanFirst Financial is trading at $18.10 per share, or 0.6x forward P/B. If you’re considering OCFC for your portfolio, see our FREE research report to learn more.

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