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.
The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Wendy's (WEN)
Market Cap: $2.26 billion
Founded by Dave Thomas in 1969, Wendy’s (NASDAQ: WEN) is a renowned fast-food chain known for its fresh, never-frozen beef burgers, flavorful menu options, and commitment to quality.
Why Does WEN Give Us Pause?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Wendy’s stock price of $11.72 implies a valuation ratio of 11.6x forward P/E. Check out our free in-depth research report to learn more about why WEN doesn’t pass our bar.
Jazz Pharmaceuticals (JAZZ)
Market Cap: $6.51 billion
Originally founded in 2003 and now headquartered in Ireland following a 2012 tax inversion merger, Jazz Pharmaceuticals (NASDAQGS:JAZZ) develops and markets medicines for sleep disorders, epilepsy, and cancer, with a focus on treatments for patients with limited therapeutic options.
Why Does JAZZ Worry Us?
- Muted 4.3% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 6.7 percentage points
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its shrinking returns suggest its past profit sources are losing steam
Jazz Pharmaceuticals is trading at $107.51 per share, or 4.6x forward P/E. Read our free research report to see why you should think twice about including JAZZ in your portfolio.
U.S. Cellular (USM)
Market Cap: $5.32 billion
Operating as a majority-owned subsidiary of Telephone and Data Systems since its founding in 1983, US Cellular (NYSE: USM) is a regional wireless telecommunications provider serving 4.6 million customers across 21 states with mobile phone, internet, and IoT services.
Why Should You Dump USM?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.6% annually over the last five years
- Overall productivity fell over the last five years as its plummeting sales were accompanied by a decline in its adjusted operating margin
- Earnings per share have dipped by 18% annually over the past five years, which is concerning because stock prices follow EPS over the long term
At $62.54 per share, U.S. Cellular trades at 5.6x forward EV-to-EBITDA. To fully understand why you should be careful with USM, check out our full research report (it’s free).
Stocks We Like More
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
While the crowd speculates what might happen next, we’re homing in on the companies that can succeed regardless of the political or macroeconomic environment. Put yourself in the driver’s seat and build a durable portfolio by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
