3 Small-Cap Stocks in Hot Water

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. That said, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.

Penguin Solutions (PENG)

Market Cap: $908.8 million

Based in the US, Penguin Solutions (NASDAQ:PENG) is a diversified semiconductor company offering memory, digital, and LED products.

Why Should You Sell PENG?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 9.4% annually over the last two years
2. Subpar operating margin of 2% constrains its ability to invest in process improvements or effectively respond to new competitive threats
3. Underwhelming 5.4% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam

At $17 per share, Penguin Solutions trades at 10.9x forward price-to-earnings. To fully understand why you should be careful with PENG, check out our full research report (it’s free).

Torrid (CURV)

Market Cap: $548.8 million

Promoting a message of body positivity and inclusiveness, Torrid Holdings (NYSE:CURV) is a plus-size women’s apparel and accessories retailer.

Why Do We Think CURV Will Underperform?

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. Subscale operations are evident in its revenue base of $1.10 billion, meaning it has fewer distribution channels than its larger rivals
3. Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term

Torrid’s stock price of $5.25 implies a valuation ratio of 22.7x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than CURV.

Driven Brands (DRVN)

Market Cap: $2.65 billion

With approximately 5,000 locations across 49 U.S. states and 13 other countries, Driven Brands (NASDAQ:DRVN) operates a network of automotive service centers offering maintenance, car washes, paint, collision repair, and glass services across North America.

Why Is DRVN Not Exciting?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

Driven Brands is trading at $16.12 per share, or 13x forward price-to-earnings. Read our free research report to see why you should think twice about including DRVN in your portfolio.

Stocks We Like More

The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.

While the crowd speculates what might happen next, we’re homing in on the companies that can succeed regardless of the political or macroeconomic environment. Put yourself in the driver’s seat and build a durable portfolio by checking out our Top 6 Stocks for this week. 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 Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.