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.

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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.

Sleep Number (SNBR)

Market Cap: $163.7 million

Known for mattresses that can be adjusted with regards to firmness, Sleep Number (NASDAQ:SNBR) manufactures and sells its own brand of bedding products such as mattresses, bed frames, and pillows.

Why Does SNBR Give Us Pause?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Forecasted revenue decline of 6.7% for the upcoming 12 months implies demand will fall off a cliff
3. 8× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Sleep Number is trading at $7.08 per share, or 16.1x forward price-to-earnings. To fully understand why you should be careful with SNBR, check out our full research report (it’s free).

Hasbro (HAS)

Market Cap: $8.42 billion

Credited with the creation of toys such as Mr. Potato Head and the Rubik’s Cube, Hasbro (NASDAQ:HAS) is a global entertainment company offering a diverse range of toys, games, and multimedia experiences for children and families.

Why Should You Sell HAS?

1. Annual sales declines of 2.6% for the past five years show its products and services struggled to connect with the market
2. Historical operating losses point to an inefficient cost structure
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $60 per share, Hasbro trades at 13.8x forward price-to-earnings. If you’re considering HAS for your portfolio, see our FREE research report to learn more.

Ameresco (AMRC)

Market Cap: $672 million

Having played a role in upgrading the energy solutions of Alcatraz Island, Ameresco (NYSE:AMRC) provides energy and renewable energy solutions for various sectors.

Why Are We Hesitant About AMRC?

1. Annual sales declines of 1.5% for the past two years show its products and services struggled to connect with the market during this cycle
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

Ameresco’s stock price of $12.30 implies a valuation ratio of 8.3x forward price-to-earnings. Read our free research report to see why you should think twice about including AMRC in your portfolio, it’s free.

Stocks We Like More

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Get started by checking out our Top 5 Growth Stocks for this month. 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.