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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Dine Brands (DIN)
Market Cap: $373.5 million
Operating a franchise model, Dine Brands (NYSE:DIN) is a casual restaurant chain that owns the Applebee’s and IHOP banners.
Why Are We Out on DIN?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Efficiency has decreased over the last year as its operating margin fell by 4 percentage points
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $30.08 per share, Dine Brands trades at 6.1x forward P/E. Dive into our free research report to see why there are better opportunities than DIN.
Novanta (NOVT)
Market Cap: $5.57 billion
Originally a pioneer in the laser scanning industry during the late 1960s, Novanta (NASDAQ:NOVT) offers medicine and manufacturing technology to the medical, life sciences, and manufacturing industries.
Why Are We Wary of NOVT?
- Annual revenue growth of 6.1% over the last two years was below our standards for the industrials sector
- Estimated sales growth of 6.5% for the next 12 months is soft and implies weaker demand
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 5.3% annually
Novanta is trading at $156.30 per share, or 6.8x trailing 12-month price-to-sales. To fully understand why you should be careful with NOVT, check out our full research report (it’s free).
OceanFirst Financial (OCFC)
Market Cap: $1.04 billion
Tracing its roots back to 1902 when it began serving coastal New Jersey communities, OceanFirst Financial (NASDAQ:OCFC) operates as a regional bank holding company that provides commercial and consumer banking services primarily in New Jersey and surrounding metropolitan areas.
Why Do We Steer Clear of OCFC?
- Annual net interest income growth of 3.8% over the last five years was below our standards for the banking sector
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 4.9% annually while its revenue grew
- Tangible book value per share is projected to decrease by 1.5% over the next 12 months as capital erosion continues
OceanFirst Financial’s stock price of $18.17 implies a valuation ratio of 0.7x forward P/B. Check out our free in-depth research report to learn more about why OCFC doesn’t pass our bar.
Stocks We Like More
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today.