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.

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 avoid and some other investments you should consider instead.

Campbell's (CPB)

Market Cap: $7.47 billion

With its iconic canned soup as its cornerstone product, Campbell's (NASDAQ: CPB) is a packaged food company with an illustrious portfolio of brands.

Why Do We Pass on CPB?

1. Flat unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
2. Estimated sales decline of 2.5% for the next 12 months implies a challenging demand environment
3. Earnings per share fell by 1.3% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable

At $25.11 per share, Campbell's trades at 10.3x forward P/E. To fully understand why you should be careful with CPB, check out our full research report (it’s free).

Shoals (SHLS)

Market Cap: $979.6 million

Started in Huntsville, Alabama, Shoals (NASDAQ: SHLS) designs and manufactures products that make solar energy systems work more efficiently.

Why Are We Hesitant About SHLS?

1. Annual sales declines of 1.4% for the past two years show its products and services struggled to connect with the market during this cycle
2. Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
3. Eroding returns on capital suggest its historical profit centers are aging

Shoals is trading at $5.90 per share, or 14.8x forward P/E. Read our free research report to see why you should think twice about including SHLS in your portfolio.

First Merchants (FRME)

Market Cap: $2.44 billion

Dating back to 1893 when it first opened its doors in Indiana, First Merchants (NASDAQ: FRME) is a Midwest regional bank providing commercial, consumer, and wealth management services through branches in Indiana, Ohio, Michigan, and Illinois.

Why Should You Sell FRME?

1. Sales were flat over the last two years, indicating it’s failed to expand this cycle
2. Net interest income trends were unexciting over the last five years as its 7% annual growth was below the typical banking firm
3. Flat earnings per share over the last two years lagged its peers

First Merchants’s stock price of $38.53 implies a valuation ratio of 0.9x forward P/B. If you’re considering FRME for your portfolio, see our FREE research report to learn more.

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