3 Small-Cap Stocks in Hot Water

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 swipe left on and some alternatives you should look into instead.

Sprinklr (CXM)

Market Cap: $2.27 billion

Initially focused only on social media management, Sprinklr (NYSE: CXM) is a leading provider of unified customer experience management software.

Why Is CXM Not Exciting?

1. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 5.5% underwhelmed
2. Estimated sales growth of 3.3% for the next 12 months implies demand will slow from its three-year trend
3. Efficiency has decreased over the last year as its operating margin fell by 1.6 percentage points

Sprinklr is trading at $8.66 per share, or 2.9x forward price-to-sales. Read our free research report to see why you should think twice about including CXM in your portfolio.

Arhaus (ARHS)

Market Cap: $1.33 billion

With an aesthetic that features natural materials such as reclaimed wood, Arhaus (NASDAQ:ARHS) is a high-end furniture retailer that sells everything from sofas to rugs to bookcases.

Why Are We Cautious About ARHS?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
2. Revenue base of $1.27 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
3. Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 5.9 percentage points

Arhaus’s stock price of $9.04 implies a valuation ratio of 18.1x forward price-to-earnings. If you’re considering ARHS for your portfolio, see our FREE research report to learn more.

FARO (FARO)

Market Cap: $541 million

Launched by two PhD students in a garage, FARO (NASDAQ:FARO) provides 3D measurement and imaging systems for the manufacturing, construction, engineering, and public safety industries.

Why Are We Wary of FARO?

1. Sales tumbled by 2.2% annually over the last five years, showing market trends are working against its favor during this cycle
2. Suboptimal cost structure is highlighted by its history of operating losses
3. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value

At $28.50 per share, FARO trades at 28.7x forward price-to-earnings. Read our free research report to see why you should think twice about including FARO in your portfolio.

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 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.