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.

These trade-offs can cause headaches for even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. Keeping that in mind, here are three small-cap stocks to pass on and some alternatives you should look into instead.

Zillow (ZG)

Market Cap: $7.66 billion

Founded by Expedia co-founders Lloyd Frink and Rich Barton, Zillow (NASDAQ: ZG) is the leading U.S. online real estate marketplace.

Why Are We Bearish on ZG?

1. Products and services have few die-hard fans as sales have declined by 6.7% annually over the last five years
2. Earnings per share lagged its peers over the last five years as they only grew by 5.8% annually
3. Low free cash flow margin of 11.6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

Zillow’s stock price of $33.65 implies a valuation ratio of 14.6x forward P/E. Dive into our free research report to see why there are better opportunities than ZG.

Carriage Services (CSV)

Market Cap: $587.3 million

Established in 1991, Carriage Services (NYSE: CSV) is a provider of funeral and cemetery services in the United States.

Why Do We Think CSV Will Underperform?

1. Lackluster 3% annual revenue growth over the last five years indicates the company is losing ground to competitors
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. Returns on capital haven’t budged, indicating management couldn’t drive additional value creation

Carriage Services is trading at $36.89 per share, or 11.5x forward P/E. To fully understand why you should be careful with CSV, check out our full research report (it’s free).

United Community Banks (UCB)

Market Cap: $4.28 billion

Starting as a small community bank in 1950 and expanding through strategic acquisitions across the Southeast, United Community Banks (NYSE: UCB) is a regional bank holding company that provides financial services including loans, deposits, wealth management, and merchant services across the southeastern United States.

Why Does UCB Fall Short?

1. Muted 8% annual revenue growth over the last two years shows its demand lagged behind its banking peers
2. Estimated net interest income growth of 1.5% for the next 12 months implies demand will slow from its five-year trend
3. Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable

At $35.87 per share, United Community Banks trades at 1.1x forward P/B. If you’re considering UCB for your portfolio, see our FREE research report to learn more.

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