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.
Allegro MicroSystems (ALGM)
Market Cap: $6.86 billion
The result of a spinoff from Sanken in Japan, Allegro MicroSystems (NASDAQ: ALGM) is a designer of power management chips and distance sensors used in electric vehicles and data centers.
Why Do We Think Twice About ALGM?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 11.8% annually over the last two years
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 15.2% annually
- Low free cash flow margin of 7.9% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Allegro MicroSystems’s stock price of $37.18 implies a valuation ratio of 42.1x forward P/E. To fully understand why you should be careful with ALGM, check out our full research report (it’s free).
Cable One (CABO)
Market Cap: $528 million
Founded in 1986, Cable One (NYSE: CABO) provides high-speed internet, cable television, and telephone services, primarily in smaller markets across the United States.
Why Should You Sell CABO?
- Sluggish trends in its residential data subscribers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Forecasted free cash flow margin suggests the company will fail to improve its cash conversion over the next year
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $90.97 per share, Cable One trades at 2.2x forward P/E. Dive into our free research report to see why there are better opportunities than CABO.
Global Industrial (GIC)
Market Cap: $1.29 billion
Formerly known as Systemax, Global Industrial (NYSE: GIC) distributes industrial and commercial products to businesses and institutions.
Why Do We Think GIC Will Underperform?
- Muted 4% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Earnings per share were flat over the last two years and fell short of the peer group average
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Global Industrial is trading at $33.79 per share, or 16.6x forward P/E. Read our free research report to see why you should think twice about including GIC in your portfolio.
Stocks We Like More
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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-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today.
