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 avoid and some other investments you should consider instead.
Kulicke and Soffa (KLIC)
Market Cap: $4.76 billion
Headquartered in Singapore, Kulicke & Soffa (NASDAQ: KLIC) is a provider of production equipment and tools used to assemble semiconductor devices
Why Are We Wary of KLIC?
- Sales tumbled by 4.7% annually over the last five years, showing market trends are working against it during this cycle
- Overall productivity fell over the last five years as its plummeting sales were accompanied by a decline in its operating margin
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 18.1 percentage points
At $90.87 per share, Kulicke and Soffa trades at 14.8x forward P/E. To fully understand why you should be careful with KLIC, check out our full research report (it’s free).
Mission Produce (AVO)
Market Cap: $1.14 billion
Founded in 1983 in California, Mission Produce (NASDAQ: AVO) grows, packages, and distributes avocados.
Why Does AVO Worry Us?
- Subscale operations are evident in its revenue base of $1.25 billion, meaning it has fewer distribution channels than its larger rivals
- Gross margin of 11.6% is an output of its commoditized products
- Low returns on capital reflect management’s struggle to allocate funds effectively
Mission Produce’s stock price of $12.91 implies a valuation ratio of 18.3x forward P/E. Dive into our free research report to see why there are better opportunities than AVO.
Hertz (HTZ)
Market Cap: $873.3 million
Started with a dozen Model T Fords, Hertz (NASDAQ: HTZ) is a global car rental company providing vehicle rental services to leisure and business travelers.
Why Do We Avoid HTZ?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.2% annually over the last two years
- Diminishing returns on capital suggest its earlier profit pools are drying up
- 9× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Hertz is trading at $2.47 per share, or 56.1x forward EV-to-EBITDA. If you’re considering HTZ for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+271% between June 2020 and June 2025). Find your next big winner with StockStory today.
