Yahoo Finance

Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.

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.

Lucky Strike (LUCK)

Market Cap: $1.27 billion

Born from the transformation of traditional bowling alleys into modern entertainment destinations, Lucky Strike (NYSE:LUCK) operates bowling alleys and other entertainment venues with upscale amenities, arcade games, and food and beverage services across North America.

Why Is LUCK Risky?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores

2. Negative free cash flow raises questions about the return timeline for its investments

3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Lucky Strike’s stock price of $9.09 implies a valuation ratio of 30.3x forward P/E. Read our free research report to see why you should think twice about including LUCK in your portfolio, it’s free.

Collegium Pharmaceutical (COLL)

Market Cap: $934.4 million

Pioneering abuse-deterrent technology in a field plagued by addiction concerns, Collegium Pharmaceutical (NASDAQ:COLL) develops and markets specialty medications for treating moderate to severe pain, including abuse-deterrent opioid formulations.

Why Does COLL Fall Short?

1. Modest revenue base of $664.3 million gives it less fixed cost leverage and fewer distribution channels than larger companies

2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6.5 percentage points

3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Collegium Pharmaceutical is trading at $29.07 per share, or 4x forward P/E. Check out our free in-depth research report to learn more about why COLL doesn’t pass our bar.

IAC (IAC)

Market Cap: $3.11 billion

Originally known as InterActiveCorp and built through Barry Diller's strategic acquisitions since the 1990s, IAC (NASDAQ:IAC) operates a portfolio of category-leading digital businesses including Dotdash Meredith, Angi, and Care.com, focusing on digital publishing, home services, and caregiving platforms.

Why Do We Avoid IAC?

1. Annual sales declines of 24.7% for the past two years show its products and services struggled to connect with the market during this cycle

2. Historically negative EPS casts doubt for cautious investors and clouds its long-term earnings prospects

3. Push for growth has led to negative returns on capital, signaling value destruction