Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.
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.
Allegro MicroSystems (ALGM)
Market Cap: $4.30 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 Does ALGM Worry Us?
- Annual sales declines of 14.2% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share fell by 15.6% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Investment activity picked up over the last five years, pressuring its weak free cash flow margin of 7.8%
Allegro MicroSystems is trading at $23.32 per share, or 30.7x forward P/E. Read our free research report to see why you should think twice about including ALGM in your portfolio.
Merit Medical Systems (MMSI)
Market Cap: $4.99 billion
Founded in 1987 and now offering over 1,700 patented products across global markets, Merit Medical Systems (NASDAQ: MMSI) manufactures and markets specialized medical devices used in minimally invasive procedures for cardiology, radiology, oncology, critical care, and endoscopy.
Why Are We Hesitant About MMSI?
- Modest revenue base of $1.48 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $83.88 per share, Merit Medical Systems trades at 21.5x forward P/E. Check out our free in-depth research report to learn more about why MMSI doesn’t pass our bar.
GoodRx (GDRX)
Market Cap: $947 million
Started in 2011 to tackle the problem of high prescription drug costs in America, GoodRx (NASDAQ: GDRX) operates a digital platform that helps consumers find lower prices on prescription medications through price comparison tools and discount codes.
Why Should You Dump GDRX?
- Underwhelming customer growth over the past two years shows the company faced challenges in winning new contracts
- Smaller revenue base of $800.7 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Push for growth has led to negative returns on capital, signaling value destruction
GoodRx’s stock price of $2.71 implies a valuation ratio of 7x forward P/E. Read our free research report to see why you should think twice about including GDRX in your portfolio.
High-Quality Stocks for All Market Conditions
The market’s up big this year - but there’s a catch. Just 4 stocks account for half the S&P 500’s entire gain. That kind of concentration makes investors nervous, and for good reason. While everyone piles into the same crowded names, smart investors are hunting quality where no one’s looking - and paying a fraction of the price. Check out the high-quality names we’ve flagged 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 for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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