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.
Topgolf Callaway (MODG)
Market Cap: $1.61 billion
Formed between the merger of Callaway and Topgolf, Topgolf Callaway (NYSE:MODG) sells golf equipment and operates technology-driven golf entertainment venues.
Why Should You Dump MODG?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 22.6% annually while its revenue grew
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Topgolf Callaway’s stock price of $8.90 implies a valuation ratio of 3.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including MODG in your portfolio.
Driven Brands (DRVN)
Market Cap: $2.89 billion
With approximately 5,000 locations across 49 U.S. states and 13 other countries, Driven Brands (NASDAQ:DRVN) operates a network of automotive service centers offering maintenance, car washes, paint, collision repair, and glass services across North America.
Why Are We Hesitant About DRVN?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $17.61 per share, Driven Brands trades at 13.7x forward P/E. Dive into our free research report to see why there are better opportunities than DRVN.
Essent Group (ESNT)
Market Cap: $6.04 billion
Serving as a crucial bridge between homebuyers and the American dream of homeownership, Essent Group (NYSE:ESNT) provides private mortgage insurance and title services that enable lenders to offer home loans with down payments of less than 20%.
Why Does ESNT Fall Short?
- Annual net premiums earned growth of 3.2% over the last four years was below our standards for the insurance sector
- Costs have risen faster than its revenue over the last two years, causing its pre-tax profit margin to decline by 19.5 percentage points
- Incremental sales over the last two years were less profitable as its earnings per share were flat while its revenue grew
Essent Group is trading at $59.55 per share, or 1x forward P/B. Check out our free in-depth research report to learn more about why ESNT doesn’t pass our bar.
High-Quality Stocks for All Market Conditions
Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.
While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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