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.
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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Carter's (CRI)
Market Cap: $1.48 billion
Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE:CRI) is an American designer and marketer of children's apparel.
Why Is CRI Risky?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Carter’s stock price of $40.55 implies a valuation ratio of 11.3x forward P/E. Dive into our free research report to see why there are better opportunities than CRI.
Enphase (ENPH)
Market Cap: $5.91 billion
The first company to successfully commercialize the solar micro-inverter, Enphase (NASDAQ:ENPH) manufactures software-driven home energy products.
Why Do We Pass on ENPH?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 12.5% annually over the last two years
- Free cash flow margin shrank by 10.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Eroding returns on capital suggest its historical profit centers are aging
At $44.88 per share, Enphase trades at 22.4x forward P/E. To fully understand why you should be careful with ENPH, check out our full research report (it’s free).
OFG Bancorp (OFG)
Market Cap: $2.09 billion
Originally founded in 1964 as a federal savings and loan institution, OFG Bancorp (NYSE:OFG) provides banking and financial services including commercial and consumer lending, wealth management, insurance, and trust services primarily in Puerto Rico and the U.S. Virgin Islands.
Why Does OFG Fall Short?
- 8.8% annual net interest income growth over the last five years was slower than its banking peers
- Forecasted net interest income decline of 1.9% for the upcoming 12 months implies demand will fall off a cliff
- Concessions to defend its market share have ramped up over the last two years as its net interest margin decreased by 55.7 basis points (100 basis points = 1 percentage point)
OFG Bancorp is trading at $49.42 per share, or 1.4x forward P/B. Read our free research report to see why you should think twice about including OFG in your portfolio.
Stocks We Like More
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.