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. 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: $3.13 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?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Estimated sales growth of 4.8% for the next 12 months implies demand will slow from its seven-year trend
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
The Cheesecake Factory’s stock price of $62.18 implies a valuation ratio of 15.4x forward P/E. Dive into our free research report to see why there are better opportunities than CAKE.
Lovesac (LOVE)
Market Cap: $231.1 million
Known for its oversized, premium beanbags, Lovesac (NASDAQ:LOVE) is a specialty furniture brand selling modular furniture.
Why Do We Steer Clear of LOVE?
- Sales trends were unexciting over the last five years as its 16.8% annual growth was below the typical consumer discretionary company
- Projected 2.5 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Lovesac is trading at $15.83 per share, or 8.7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why LOVE doesn’t pass our bar.
Kemper (KMPR)
Market Cap: $1.98 billion
Originally known as Unitrin until rebranding in 2011, Kemper (NYSE:KMPR) is an insurance holding company that provides automobile, homeowners, life, and other insurance products to individuals and businesses across the United States.
Why Do We Pass on KMPR?
- Net premiums earned contracted by 1.2% annually over the last five years, showing unfavorable market dynamics this cycle
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
- Policy losses and capital returns have eroded its book value per share this cycle as its book value per share declined by 8.1% annually over the last five years
At $33.70 per share, Kemper trades at 0.7x forward P/B. If you’re considering KMPR for your portfolio, see our FREE research report to learn more.
High-Quality Stocks for All Market Conditions
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
Our AI system flagged Palantir before it ran 1,662%. AppLovin before it ran 753%. Nvidia before it ran 1,178%. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.