Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Lovesac (LOVE)
Market Cap: $207.7 million
Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.
Why Do We Pass on LOVE?
- Muted 12.3% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Low free cash flow margin of 2.5% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $14.38 per share, Lovesac trades at 90.7x forward P/E. Dive into our free research report to see why there are better opportunities than LOVE.
KBR (KBR)
Market Cap: $4.63 billion
Known for projects like the construction of Guantanamo Bay, KBR provides professional services and technologies, specializing in engineering, construction, and government services sectors.
Why Is KBR Not Exciting?
- Muted 3.8% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Sales pipeline suggests its future revenue growth likely won’t meet our standards as its backlog hasn’t budged over the past two years
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
KBR’s stock price of $36.51 implies a valuation ratio of 8.9x forward P/E. If you’re considering KBR for your portfolio, see our FREE research report to learn more.
LifeStance Health Group (LFST)
Market Cap: $4.50 billion
With over 6,600 licensed mental health professionals treating more than 880,000 patients annually, LifeStance Health (NASDAQ: LFST) provides outpatient mental health services through a network of clinicians offering psychiatric evaluations, psychological testing, and therapy across 33 states.
Why Are We Cautious About LFST?
- Revenue base of $1.58 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Poor free cash flow margin of 3% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Negative returns on capital show management lost money while trying to expand the business
LifeStance Health Group is trading at $11.78 per share, or 30.9x forward P/E. To fully understand why you should be careful with LFST, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,552% between June 2020 and June 2025). Find your next big winner with StockStory today.
