3 Small-Cap Stocks That Concern Us

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

The Cheesecake Factory (CAKE)

Market Cap: $2.47 billion

Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ:CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.

Why Are We Cautious About CAKE?

1. Poor expense management has led to an operating margin of 4.1% that is below the industry average
2. Underwhelming -0.3% return on capital reflects management’s difficulties in finding profitable growth opportunities
3. High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate

At $47.30 per share, The Cheesecake Factory trades at 12.9x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than CAKE.

Smith & Wesson (SWBI)

Market Cap: $412.3 million

With a history dating back to 1852, Smith & Wesson (NASDAQ:SWBI) is a firearms manufacturer known for its handguns and rifles.

Why Are We Out on SWBI?

1. Flat sales over the last five years suggest it must innovate and find new ways to grow
2. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Smith & Wesson is trading at $9.48 per share, or 16.7x forward price-to-earnings. Read our free research report to see why you should think twice about including SWBI in your portfolio.

Fluence Energy (FLNC)

Market Cap: $479.9 million

Pioneering the use of lithium-ion batteries for grid storage, Fluence (NASDAQ:FLNC) helps store renewable energy sources with battery systems.

Why Is FLNC Not Exciting?

1. Gross margin of 6.2% reflects its high production costs
2. 5.2 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

Fluence Energy’s stock price of $3.60 implies a valuation ratio of 4.1x forward price-to-earnings. Check out our free in-depth research report to learn more about why FLNC doesn’t pass our bar.

Stocks We Like More

Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.

While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 9 Market-Beating Stocks. 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 United Rentals (+322% five-year return). Find your next big winner with StockStory today for free.