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.
El Pollo Loco (LOCO)
Market Cap: $315.3 million
With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ: LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.
Why Do We Pass on LOCO?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
- Modest revenue base of $479.7 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Projected sales growth of 4% for the next 12 months suggests sluggish demand
El Pollo Loco’s stock price of $10.51 implies a valuation ratio of 12.2x forward P/E. Check out our free in-depth research report to learn more about why LOCO doesn’t pass our bar.
Fluence Energy (FLNC)
Market Cap: $1.02 billion
Pioneering the use of lithium-ion batteries for grid storage, Fluence (NASDAQ: FLNC) helps store renewable energy sources with battery systems.
Why Are We Hesitant About FLNC?
- Gross margin of 7.2% reflects its high production costs
- Free cash flow margin shrank by 6.4 percentage points over the last five years, suggesting the company stepped up its investments to maintain its competitive edge
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $7.70 per share, Fluence Energy trades at 107.9x forward P/E. Read our free research report to see why you should think twice about including FLNC in your portfolio.
Alight (ALIT)
Market Cap: $2.04 billion
Born from a corporate spinoff in 2017 to focus on employee experience technology, Alight (NYSE: ALIT) provides human capital management solutions that help companies administer employee benefits, payroll, and workforce management systems.
Why Should You Dump ALIT?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.5% annually over the last five years
- Earnings per share have contracted by 6% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Alight is trading at $3.94 per share, or 6.1x forward P/E. If you’re considering ALIT for your portfolio, see our FREE research report to learn more.
High-Quality Stocks for All Market Conditions
When Trump unveiled his aggressive tariff plan in April 2025, markets tanked as investors feared a full-blown trade war. But those who panicked and sold missed the subsequent rebound that’s already erased most losses.
Don’t let fear keep you from great opportunities and take a look at 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 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 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 for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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