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.

Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

Sprout Social (SPT)

Market Cap: $1.25 billion

Founded by Justyn Howard and Aaron Rankin in 2010, Sprout Social (NASDAQ:SPT) provides a software as a service platform that companies can use to schedule and respond to posts on major social media networks like Twitter, Facebook, Instagram, Youtube and LinkedIn.

Why Are We Cautious About SPT?

1. Rapid expansion strategy came at the expense of operating profitability
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 6.1% for the last year

Sprout Social is trading at $21.44 per share, or 2.7x forward price-to-sales. Check out our free in-depth research report to learn more about why SPT doesn’t pass our bar.

NeoGenomics (NEO)

Market Cap: $990.9 million

Operating a network of CAP-accredited and CLIA-certified laboratories across the United States and United Kingdom, NeoGenomics (NASDAQ:NEO) provides specialized cancer diagnostic testing services, including genetic analysis, molecular testing, and pathology consultation for oncologists and healthcare providers.

Why Is NEO Risky?

1. Issuance of new shares over the last five years caused its earnings per share to fall by 11.9% annually while its revenue grew
2. Negative returns on capital show management lost money while trying to expand the business, and its decreasing returns suggest its historical profit centers are aging
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

At $7.50 per share, NeoGenomics trades at 34.5x forward P/E. If you’re considering NEO for your portfolio, see our FREE research report to learn more.

Acadia Healthcare (ACHC)

Market Cap: $2.15 billion

With a network of over 250 facilities serving patients in 38 states and Puerto Rico, Acadia Healthcare (NASDAQ:ACHC) operates facilities providing mental health and substance use disorder treatment services across the United States.

Why Does ACHC Fall Short?

1. Flat sales over the last five years suggest it must find different ways to grow during this cycle
2. Underwhelming admissions over the past two years suggest it might have to lower prices to accelerate growth
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 38.5 percentage points

Acadia Healthcare’s stock price of $23.31 implies a valuation ratio of 6.9x forward P/E. To fully understand why you should be careful with ACHC, check out our full research report (it’s free).

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