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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.

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 swipe left on and some alternatives you should look into instead.

Post (POST)

Market Cap: $6.38 billion

Founded in 1895, Post (NYSE:POST) is a packaged food company known for its namesake breakfast cereal and healthier-for-you snacks.

Why Does POST Worry Us?

1. Shrinking unit sales over the past two years suggest it might have to lower prices to stimulate growth

2. Sales are projected to remain flat over the next 12 months as demand decelerates from its three-year trend

3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

Post is trading at $112.90 per share, or 17.4x forward P/E. To fully understand why you should be careful with POST, check out our full research report (it’s free).

The Toro Company (TTC)

Market Cap: $7.05 billion

Ceasing all production to support the war effort during World War II, Toro (NYSE:TTC) offers outdoor equipment for residential, commercial, and agricultural use.

Why Do We Think TTC Will Underperform?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.6% annually over the last two years

2. Free cash flow margin shrank by 5.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

3. Diminishing returns on capital suggest its earlier profit pools are drying up

The Toro Company’s stock price of $70.67 implies a valuation ratio of 15.8x forward P/E. Check out our free in-depth research report to learn more about why TTC doesn’t pass our bar.

THOR Industries (THO)

Market Cap: $3.99 billion

Created through the acquisition and merger of various RV manufacturers, THOR Industries manufactures and sells a range of recreational vehicles, including motorhomes and travel trailers, catering to consumers seeking the freedom and comfort of the RV lifestyle.

Why Are We Out on THO?

1. Annual sales declines of 17.4% for the past two years show its products and services struggled to connect with the market during this cycle

2. Earnings per share have dipped by 3.5% annually over the past five years, which is concerning because stock prices follow EPS over the long term

3. Waning returns on capital imply its previous profit engines are losing steam