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. That said, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.

The RealReal (REAL)

Market Cap: $693.1 million

Founded by consignment store aficionado Julie Wainwright, The RealReal (NASDAQ: REAL) is an online marketplace for buying and selling secondhand luxury goods.

Why Is REAL Not Exciting?

1. Active Buyers have declined by 7.7% annually over the last two years, suggesting it may need to revamp its features or user experience to stay competitive
2. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
3. High net-debt-to-EBITDA ratio of 23× could force the company to raise capital at unfavorable terms if market conditions deteriorate

The RealReal is trading at $6.31 per share, or 24.5x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than REAL.

Xponential Fitness (XPOF)

Market Cap: $446.5 million

Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE:XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.

Why Does XPOF Worry Us?

1. Estimated sales growth of 2.1% for the next 12 months implies demand will slow from its two-year trend
2. Responsiveness to unforeseen market trends is restricted due to its substandard operating profitability

Xponential Fitness’s stock price of $13.96 implies a valuation ratio of 7.9x forward price-to-earnings. Check out our free in-depth research report to learn more about why XPOF doesn’t pass our bar.

Leonardo DRS (DRS)

Market Cap: $7.96 billion

Developing submarine detection systems for the U.S. Navy, Leonardo DRS (NASDAQ:DRS) is a provider of defense systems, electronics, and military support services.

Why Are We Wary of DRS?

1. 3.9% annual revenue growth over the last four years was slower than its industrials peers
2. Earnings per share have contracted by 1.8% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

At $29.55 per share, Leonardo DRS trades at 28.2x forward price-to-earnings. To fully understand why you should be careful with DRS, check out our full research report (it’s free).

Stocks We Like More

The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market - and we’re zeroing in on the stocks that could benefit immensely.

Take advantage of the rebound by checking out 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 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.