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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Grocery Outlet (GO)
Market Cap: $1.37 billion
Due to its differentiated procurement and buying approach, Grocery Outlet (NASDAQ: GO) is a discount grocery store chain that offers substantial discounts on name-brand products.
Why Are We Hesitant About GO?
- Already-low operating margin of 1.8% fell over the last year, and the smaller profit dollars make it harder to react to unexpected market developments
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its shrinking returns suggest its past profit sources are losing steam
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Grocery Outlet’s stock price of $13.95 implies a valuation ratio of 17.7x forward P/E. Read our free research report to see why you should think twice about including GO in your portfolio.
Terex (TEX)
Market Cap: $3.08 billion
With humble beginnings as a dump truck company, Terex (NYSE: TEX) today manufactures lifting and material handling equipment designed to move and hoist heavy goods and materials.
Why Is TEX Not Exciting?
- 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
- Earnings per share have contracted by 16.4% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- 6.1 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Terex is trading at $46.90 per share, or 9.6x forward P/E. To fully understand why you should be careful with TEX, check out our full research report (it’s free).
Amentum (AMTM)
Market Cap: $5.26 billion
With operations spanning approximately 80 countries and a workforce of specialized engineers and technical experts, Amentum Holdings (NYSE: AMTM) provides advanced engineering and technology solutions to U.S. government agencies, allied governments, and commercial enterprises across defense, energy, and space sectors.
Why Does AMTM Give Us Pause?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 2.4% for the last three years
- Estimated sales growth of 1.8% for the next 12 months implies demand will slow from its two-year trend
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $21.50 per share, Amentum trades at 9.8x forward P/E. If you’re considering AMTM for your portfolio, see our FREE research report to learn more.
Stocks We Like More
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
While the crowd speculates what might happen next, we’re homing in on the companies that can succeed regardless of the political or macroeconomic environment. Put yourself in the driver’s seat and build a durable portfolio by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 176% over the last five years.
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 Comfort Systems (+782% five-year return). Find your next big winner with StockStory today for free.
