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.
Wyndham (WH)
Market Cap: $7.10 billion
Established in 1981, Wyndham (NYSE:WH) is a global hotel franchising company with over 9,000 hotels across nearly 95 countries on six continents.
Why Does WH Give Us Pause?
- Weak revenue per room over the past two years indicates challenges in maintaining pricing power and occupancy rates
- Anticipated sales growth of 6.7% for the next year implies demand will be shaky
- Underwhelming 9.4% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $92.26 per share, Wyndham trades at 19.2x forward price-to-earnings. Read our free research report to see why you should think twice about including WH in your portfolio.
Planet Fitness (PLNT)
Market Cap: $7.85 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 Hesitant About PLNT?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
- Estimated sales growth of 10.3% for the next 12 months implies demand will slow from its two-year trend
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Planet Fitness is trading at $94.47 per share, or 31.8x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than PLNT.
Merit Medical Systems (MMSI)
Market Cap: $5.79 billion
Founded in 1987, Merit Medical Systems (NASDAQ:MMSI) designs and manufactures medical devices used in interventional, diagnostic, and therapeutic procedures, with a focus on cardiology, radiology, and endoscopy.
Why Are We Wary of MMSI?
- 6.4% annual revenue growth over the last five years was slower than its healthcare peers
- Revenue base of $1.36 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- ROIC of 3.5% reflects management’s challenges in identifying attractive investment opportunities
Merit Medical Systems’s stock price of $97.56 implies a valuation ratio of 26.3x forward price-to-earnings. If you’re considering MMSI for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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