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.

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.

Arcos Dorados (ARCO)

Market Cap: $1.79 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 Are We Hesitant About ARCO?

1. Estimated sales growth of 3.9% for the next 12 months implies demand will slow from its five-year trend
2. Lacking pricing power results in an inferior gross margin of 13.4% that must be offset by turning more tables
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

Arcos Dorados’s stock price of $8.47 implies a valuation ratio of 0.4x forward price-to-sales. Read our free research report to see why you should think twice about including ARCO in your portfolio, it’s free.

ABM (ABM)

Market Cap: $2.94 billion

With roots dating back to 1909 as a window washing company, ABM Industries (NYSE:ABM) provides integrated facility management, infrastructure, and mobility solutions across various sectors including commercial, manufacturing, education, and aviation.

Why Do We Think ABM Will Underperform?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Incremental sales over the last two years were less profitable as its 1.3% annual earnings per share growth lagged its revenue gains
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.9 percentage points

ABM is trading at $47.56 per share, or 12.4x forward price-to-earnings. Check out our free in-depth research report to learn more about why ABM doesn’t pass our bar.

Rumble (RUM)

Market Cap: $2.49 billion

Founded in 2013 as a champion for content creator rights and free expression, Rumble (NASDAQ:RUM) is a video sharing platform that positions itself as a free speech alternative to mainstream platforms, offering creators more favorable revenue-sharing opportunities.

Why Does RUM Fall Short?

1. Costs have risen faster than its revenue over the last four years, causing its operating margin to decline by 149.8 percentage points
2. Investments to defend its competitive moat have ramped up over the last four years as its free cash flow margin decreased by 126.6 percentage points
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

At $7.81 per share, Rumble trades at 18.7x trailing 12-month price-to-sales. To fully understand why you should be careful with RUM, check out our full research report (it’s free).

Stocks We Like More

With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.

Put yourself in the driver’s seat by checking out 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 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 United Rentals (+322% five-year return). Find your next big winner with StockStory today for free.