Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.
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.
Bright Horizons (BFAM)
Market Cap: $6.90 billion
Founded in 1986, Bright Horizons (NYSE:BFAM) is a global provider of child care, early education, and workforce support solutions.
Why Should You Sell BFAM?
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Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
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Annual earnings per share growth of 1.8% underperformed its revenue over the last five years, showing its incremental sales were less profitable
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ROIC of 4.3% reflects management’s challenges in identifying attractive investment opportunities
Bright Horizons’s stock price of $120.58 implies a valuation ratio of 28.9x forward P/E. To fully understand why you should be careful with BFAM, check out our full research report (it’s free).
Funko (FNKO)
Market Cap: $263.8 million
Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ:FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.
Why Do We Avoid FNKO?
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Sales tumbled by 10% annually over the last two years, showing consumer trends are working against its favor
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Incremental sales over the last five years were much less profitable as its earnings per share fell by 17.2% annually while its revenue grew
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Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $4.90 per share, Funko trades at 23.1x forward P/E. Check out our free in-depth research report to learn more about why FNKO doesn’t pass our bar.
Hillman (HLMN)
Market Cap: $1.51 billion
Established when Max Hillman purchased a franchise operation, Hillman (NASDAQ:HLMN) designs, manufactures, and sells industrial equipment and systems for various sectors.
Why Does HLMN Give Us Pause?
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Sales stagnated over the last two years and signal the need for new growth strategies
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Poor expense management has led to an operating margin of 3.7% that is below the industry average
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Below-average returns on capital indicate management struggled to find compelling investment opportunities
Hillman is trading at $8 per share, or 13.5x forward P/E. To fully understand why you should be careful with HLMN, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.
While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 5 Strong Momentum 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).
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