Investors looking for hidden gems should keep an eye on small-cap stocks because they’re frequently overlooked by Wall Street. Many opportunities exist in this part of the market, but it is also a high-risk, high-reward environment due to the lack of reliable analyst price targets.
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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
RH (RH)
Market Cap: $2.77 billion
Formerly known as Restoration Hardware, RH (NYSE: RH) is a specialty retailer that exclusively sells its own brand of high-end furniture and home decor.
Why Is RH Not Exciting?
- Sales were flat over the last three years, indicating it’s failed to expand its business
- Earnings per share have contracted by 39.2% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
RH is trading at $146.21 per share, or 23.2x forward P/E. Dive into our free research report to see why there are better opportunities than RH.
Brunswick (BC)
Market Cap: $4.71 billion
Formerly known as Brunswick-Balke-Collender Company, Brunswick (NYSE: BC) is a designer and manufacturer of recreational marine products, including boats, engines, and marine parts.
Why Do We Steer Clear of BC?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Free cash flow margin is expected to increase by 2 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Brunswick’s stock price of $72.73 implies a valuation ratio of 15.5x forward P/E. To fully understand why you should be careful with BC, check out our full research report (it’s free).
Amdocs (DOX)
Market Cap: $6.61 billion
Powering the digital experiences of approximately 400 communications companies worldwide, Amdocs (NASDAQ: DOX) provides software and services that help telecommunications and media companies manage customer relationships, monetize services, and automate network operations.
Why Is DOX Risky?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 3.4% annually over the last two years
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.4%
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $63.29 per share, Amdocs trades at 7.9x forward P/E. If you’re considering DOX for your portfolio, see our FREE research report to learn more.
Stocks We Like More
WHILE YOU’RE HERE: Top 9 Market-Beating Stocks. The best stocks don’t just beat the market once. They do it again. And again. Robust revenue growth, rising free cash flow, returns on capital that leave their competition in the dust. The market has already rewarded these businesses.
But our AI platform says the party isn’t over. Find out which 9 stocks made the cut this week — FREE. Get Our Top 9 Market-Beating 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 Comfort Systems (+1,154% between June 2020 and June 2025). Find your next big winner with StockStory today.
