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.
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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Torrid (CURV)
Market Cap: $122 million
Promoting a message of body positivity and inclusiveness, Torrid Holdings (NYSE:CURV) is a plus-size women’s apparel and accessories retailer.
Why Do We Pass on CURV?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $1.28 per share, Torrid trades at 8.1x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why CURV doesn’t pass our bar.
Arcos Dorados (ARCO)
Market Cap: $1.59 billion
Translating to “Golden Arches” in Spanish, Arcos Dorados (NYSE:ARCO) is the master franchisee of the McDonald's brand in Latin America and the Caribbean, responsible for its operations and growth in over 20 countries.
Why Does ARCO Worry Us?
- Lacking pricing power results in an inferior gross margin of 12.7% that must be offset by turning more tables
- Subpar operating margin of 7.3% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Low free cash flow margin of -0.7% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Arcos Dorados is trading at $7.58 per share, or 12.1x forward P/E. To fully understand why you should be careful with ARCO, check out our full research report (it’s free).
Generac (GNRC)
Market Cap: $9.44 billion
With its name deriving from a combination of “generating” and “AC”, Generac (NYSE:GNRC) offers generators and other power products for residential, industrial, and commercial use.
Why Does GNRC Fall Short?
- Muted 4.2% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 9.5 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
Generac’s stock price of $161.55 implies a valuation ratio of 21.9x forward P/E. Read our free research report to see why you should think twice about including GNRC in your portfolio.
Stocks We Like More
Your portfolio can’t afford to be based on yesterday’s story. The risk in a handful of heavily crowded stocks is rising daily.
The names generating the next wave of massive growth are right here in 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 244% over the last five years (as of June 30, 2025).
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-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today.