Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.
These trade-offs can cause headaches for even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. Keeping that in mind, here are three small-cap stocks to pass on and some alternatives you should look into instead.
CECO Environmental (CECO)
Market Cap: $4.23 billion
With roots dating back to 1869 and a focus on creating cleaner industrial operations, CECO Environmental (NASDAQ: CECO) provides technology and expertise that helps industrial companies reduce emissions, treat water, and improve energy efficiency across various sectors.
Why Are We Wary of CECO?
- Smaller revenue base of $903.2 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy (but also enables it to grow faster if it executes properly)
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 4.8 percentage points
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital on unfavorable terms if market conditions deteriorate
CECO Environmental’s stock price of $72.28 implies a valuation ratio of 27.7x forward P/E. Dive into our free research report to see why there are better opportunities than CECO.
Trex (TREX)
Market Cap: $4.53 billion
Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE: TREX) makes wood-alternative decking, railing, and patio furniture.
Why Are We Bearish on TREX?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.7% annually over the last two years
- Free cash flow margin dropped by 7.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Eroding returns on capital suggest its historical profit centers are aging
At $45.14 per share, Trex trades at 23.3x forward P/E. If you’re considering TREX for your portfolio, see our FREE research report to learn more.
Lemonade (LMND)
Market Cap: $3.40 billion
Built on the principle of giving back unused premiums to charitable causes selected by policyholders, Lemonade (NYSE: LMND) is a technology-driven insurance company that offers homeowners, renters, pet, car, and life insurance through an AI-powered digital platform.
Why Are We Hesitant About LMND?
- Performance over the past five years shows its incremental sales were less profitable, as its 8% annual earnings per share growth trailed its revenue gains
- Annual book value per share declines of 18.4% for the past five years show its capital management struggled during this cycle
- Negative return on equity shows that some of its growth strategies have backfired
Lemonade is trading at $44.05 per share, or 7.2x forward P/B. Check out our free in-depth research report to learn more about why LMND doesn’t pass our bar.
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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 Exlservice (+271% between June 2020 and June 2025). Find your next big winner with StockStory today.
