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.
Pilgrim's Pride (PPC)
Market Cap: $8.97 billion
Offering everything from pre-marinated to frozen chicken, Pilgrim’s Pride (NASDAQ: PPC) produces, processes, and distributes chicken products to retailers and food service customers.
Why Do We Steer Clear of PPC?
- The company has faced growth challenges as its 1.9% annual revenue increases over the last three years fell short of other consumer staples companies
- Gross margin of 12.8% is below its competitors, leaving less money to invest in areas like marketing and production facilities
- Free cash flow margin dropped by 4.9 percentage points over the last year, implying the company became more capital intensive as competition picked up
Pilgrim's Pride’s stock price of $37.81 implies a valuation ratio of 9.2x forward P/E. Read our free research report to see why you should think twice about including PPC in your portfolio.
European Wax Center (EWCZ)
Market Cap: $254.4 million
Founded by two siblings, European Wax Center (NASDAQ: EWCZ) is a beauty and waxing salon chain specializing in professional wax services and skincare products.
Why Do We Avoid EWCZ?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Projected 5.1 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
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
European Wax Center is trading at $5.78 per share, or 10.1x forward P/E. Dive into our free research report to see why there are better opportunities than EWCZ.
BankUnited (BKU)
Market Cap: $3.33 billion
Born from the ashes of a failed Florida thrift during the 2009 financial crisis, BankUnited (NYSE: BKU) is a regional bank that provides commercial lending, deposit services, and treasury solutions to businesses and consumers primarily in Florida and the New York metropolitan area.
Why Does BKU Worry Us?
- Annual net interest income growth of 5.6% over the last five years was below our standards for the banking sector
- Projected 15.5 percentage point efficiency ratio increase over the next year signals its day-to-day expenses will rise
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 4.9% annually
At $45.14 per share, BankUnited trades at 1x forward P/B. Check out our free in-depth research report to learn more about why BKU doesn’t pass our bar.
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 Exlservice (+354% five-year return). Find your next big winner with StockStory today.
