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.
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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Sotera Health Company (SHC)
Market Cap: $5.21 billion
With a critical role in ensuring the safety of millions of patients worldwide, Sotera Health (NASDAQGS:SHC) provides sterilization services, lab testing, and advisory services to ensure medical devices, pharmaceuticals, and food products are safe for use.
Why Do We Think Twice About SHC?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Subscale operations are evident in its revenue base of $1.19 billion, meaning it has fewer distribution channels than its larger rivals
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 8.4 percentage points
Sotera Health Company is trading at $18.28 per share, or 18.5x forward P/E. If you’re considering SHC for your portfolio, see our FREE research report to learn more.
Applied Digital (APLD)
Market Cap: $7.56 billion
Pivoting from its origins in cryptocurrency mining to become a key player in the AI infrastructure boom, Applied Digital (NASDAQ: APLD) designs and operates specialized data centers that provide high-performance computing infrastructure for artificial intelligence and blockchain applications.
Why Are We Cautious About APLD?
- Modest revenue base of $355.5 million means it has less operating leverage but can also grow faster if it executes the right sales strategy
- Negative free cash flow raises questions about the return timeline for its investments
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Applied Digital’s stock price of $26.13 implies a valuation ratio of 38.7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why APLD doesn’t pass our bar.
Walker & Dunlop (WD)
Market Cap: $1.76 billion
Originating as a small mortgage banking firm during the Great Depression in 1937, Walker & Dunlop (NYSE: WD) provides commercial real estate financing, property sales, appraisal, and investment management services with a focus on multifamily properties.
Why Should You Dump WD?
- Loans are facing significant end-market challenges during this cycle as net interest income has declined by 37.8% annually over the last five years
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 14.4% annually
- Tangible book value per share tumbled by 7.5% annually over the last five years, showing banking sector trends are working against it during this cycle
At $51.23 per share, Walker & Dunlop trades at 0.9x forward P/B. Dive into our free research report to see why there are better opportunities than WD.
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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-micro-cap company Tecnoglass (+1,552% between June 2020 and June 2025). Find your next big winner with StockStory today.
