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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.

Olaplex (OLPX)

Market Cap: $912.1 million

Rising to fame on TikTok because of its “bond building" hair products, Olaplex (NASDAQ:OLPX) offers products and treatments that repair the damage caused by traditional heat and chemical-based styling goods.

Why Do We Pass on OLPX?

1. Products have few die-hard fans as sales have declined by 14.2% annually over the last three years

2. Sales were less profitable over the last three years as its earnings per share fell by 40.7% annually, worse than its revenue declines

3. 15.8 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position

Olaplex is trading at $1.45 per share, or 18.5x forward P/E. To fully understand why you should be careful with OLPX, check out our full research report (it’s free).

Zurn Elkay (ZWS)

Market Cap: $5.92 billion

Claiming to have saved more than 30 billion gallons of water, Zurn Elkay (NYSE:ZWS) provides water management solutions to various industries.

Why Are We Hesitant About ZWS?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth

2. Estimated sales growth of 3.5% for the next 12 months implies demand will slow from its two-year trend

3. Earnings per share decreased by more than its revenue over the last five years, partly because it diluted shareholders

Zurn Elkay’s stock price of $35.17 implies a valuation ratio of 25.8x forward P/E. Check out our free in-depth research report to learn more about why ZWS doesn’t pass our bar.

Cogent (CCOI)

Market Cap: $2.34 billion

Operating a massive network spanning 20,000 miles of fiber optic cable and connecting to over 3,200 buildings worldwide, Cogent Communications (NASDAQ:CCOI) provides high-speed Internet access, private network services, and data center colocation to businesses and bandwidth-intensive organizations across 54 countries.

Why Does CCOI Give Us Pause?

1. 37.5 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

2. Eroding returns on capital suggest its historical profit centers are aging

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