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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Elastic (ESTC)
Market Cap: $9.26 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 Give Us Pause?
- Estimated sales growth of 12.5% for the next 12 months implies demand will slow from its two-year trend
- Operating margin improvement of 7.7 percentage points over the last year demonstrates its ability to scale efficiently
- Projected 2.4 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
Elastic’s stock price of $87.16 implies a valuation ratio of 5.3x forward price-to-sales. Check out our free in-depth research report to learn more about why ESTC doesn’t pass our bar.
Steelcase (SCS)
Market Cap: $1.92 billion
Founded in 1912 when metal office furniture was replacing wooden alternatives, Steelcase (NYSE: SCS) is a global office furniture manufacturer that designs and produces workplace solutions including desks, chairs, architectural products, and services.
Why Do We Steer Clear of SCS?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Earnings per share were flat over the last five years and fell short of the peer group average
- Low free cash flow margin of 0.7% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Steelcase is trading at $16.55 per share, or 14x forward P/E. To fully understand why you should be careful with SCS, check out our full research report (it’s free for active Edge members).
Amdocs (DOX)
Market Cap: $9.19 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 Are We Out on DOX?
- Flat backlog over the past two years has disappointed and shows fewer customers signed long-term contracts
- Sales are projected to be flat over the next 12 months and imply weak demand
- 3.2 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
At $83.52 per share, Amdocs trades at 11.2x forward P/E. If you’re considering DOX for your portfolio, see our FREE research report to learn more.
Stocks We Like More
Trump’s April 2025 tariff bombshell triggered a massive market selloff, but stocks have since staged an impressive recovery, leaving those who panic sold on the sidelines.
Take advantage of the rebound by checking out 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 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
StockStory is growing and hiring equity analyst and marketing roles. Are you a 0 to 1 builder passionate about the markets and AI? See the open roles here.
