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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Elastic (ESTC)
Market Cap: $7.33 billion
Built on the powerful open-source Elasticsearch technology that powers search functionality for thousands of websites worldwide, Elastic (NYSE: ESTC) provides a search and AI platform that helps organizations find insights from their data, monitor applications, and protect against security threats.
Why Does ESTC Worry Us?
- Products, pricing, or go-to-market strategy may need some adjustments as its 13.9% average billings growth over the last year was weak
- Estimated sales growth of 13.7% for the next 12 months implies demand will slow from its two-year trend
- Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage
Elastic’s stock price of $69.72 implies a valuation ratio of 4.1x forward price-to-sales. If you’re considering ESTC for your portfolio, see our FREE research report to learn more.
Middleby (MIDD)
Market Cap: $7.57 billion
Holding a Guinness World Record for creating the world’s fastest conveyor pizza oven, Middleby (NYSE: MIDD) is a food service and equipment manufacturer.
Why Do We Think MIDD Will Underperform?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 21.1 percentage points
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Middleby is trading at $150.29 per share, or 16.1x forward P/E. Read our free research report to see why you should think twice about including MIDD in your portfolio.
Whirlpool (WHR)
Market Cap: $4.94 billion
Credited with introducing the first automatic washing machine, Whirlpool (NYSE: WHR) is a manufacturer of a variety of home appliances.
Why Are We Out on WHR?
- Underwhelming unit sales over the past two years imply it may need to invest in improvements to get back on track
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $87.77 per share, Whirlpool trades at 13.6x forward P/E. To fully understand why you should be careful with WHR, check out our full research report (it’s free).
Stocks We Like More
Your portfolio can’t afford to be based on yesterday’s story. The risk in a handful of heavily crowded stocks is rising daily.
The names generating the next wave of massive growth are right here in 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 244% over the last five years (as of June 30, 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 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.
