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.
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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
FormFactor (FORM)
Market Cap: $8.61 billion
With customers across the foundry and fabless markets, FormFactor (NASDAQ: FORM) is a US-based provider of test and measurement technologies for semiconductors.
Why Are We Hesitant About FORM?
- Annual revenue growth of 3.8% over the last five years was below our standards for the semiconductor sector
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 42.8%
- Poor free cash flow margin of 8.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $109.43 per share, FormFactor trades at 31.3x forward P/E. Read our free research report to see why you should think twice about including FORM in your portfolio.
AeroVironment (AVAV)
Market Cap: $7.68 billion
Focused on the future of autonomous military combat, AeroVironment (NASDAQ: AVAV) specializes in advanced unmanned aircraft systems and electric vehicle charging solutions.
Why Are We Wary of AVAV?
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 13.5 percentage points
- Cash-burning history makes us doubt the long-term viability of its business model
- Push for growth has led to negative returns on capital, signaling value destruction
AeroVironment is trading at $153.35 per share, or 45.3x forward P/E. Check out our free in-depth research report to learn more about why AVAV doesn’t pass our bar.
United Bankshares (UBSI)
Market Cap: $6.45 billion
With roots dating back to 1982 and a strong presence in the Mid-Atlantic region, United Bankshares (NASDAQ: UBSI) is a bank holding company that provides commercial and retail banking services through its United Bank subsidiary across multiple states.
Why Do We Avoid UBSI?
- Muted 8.5% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Estimated net interest income growth of 4% for the next 12 months implies demand will slow from its five-year trend
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 3.2% annually
United Bankshares’s stock price of $47.50 implies a valuation ratio of 1.1x forward P/B. Dive into our free research report to see why there are better opportunities than UBSI.
High-Quality Stocks for All Market Conditions
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI is taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
Our AI system flagged Palantir before it ran 1,662% between October 2022 and February 2026. AppLovin before it ran 753% between February 2024 and February 2026. Nvidia before it ran 1,178% between January 2023 and February 2026. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.
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.
