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.

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 swipe left on and some alternatives you should look into instead.

Sonos (SONO)

Market Cap: $1.54 billion

A pioneer in connected home audio systems, Sonos (NASDAQ:SONO) offers a range of premium wireless speakers and sound systems.

Why Do We Pass on SONO?

1. Sales tumbled by 9.1% annually over the last two years, showing consumer trends are working against its favor
2. Suboptimal cost structure is highlighted by its history of operating losses
3. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 5.8% annually

Sonos’s stock price of $12.98 implies a valuation ratio of 22x forward price-to-earnings. Read our free research report to see why you should think twice about including SONO in your portfolio, it’s free.

Hexcel (HXL)

Market Cap: $4.71 billion

Founded shortly after World War II by a group of engineers from UC Berkley, Hexcel (NYSE:HXL) manufactures lightweight composite materials primarily for the aerospace and defense sectors.

Why Does HXL Worry Us?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 4.2% annually over the last five years
2. Earnings per share have dipped by 10.5% annually over the past five years, which is concerning because stock prices follow EPS over the long term
3. Low returns on capital reflect management’s struggle to allocate funds effectively

At $58.59 per share, Hexcel trades at 24.5x forward price-to-earnings. Check out our free in-depth research report to learn more about why HXL doesn’t pass our bar.

Hertz (HTZ)

Market Cap: $1.26 billion

Started with a dozen Model T Fords, Hertz (NASDAQ:HTZ) is a global car rental company providing vehicle rental services to leisure and business travelers.

Why Should You Dump HTZ?

1. Weak unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Waning returns on capital imply its previous profit engines are losing steam
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

Hertz is trading at $4.13 per share, or 3.4x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than HTZ.

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