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.
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.
Smith & Wesson (SWBI)
Market Cap: $604.3 million
With a history dating back to 1852, Smith & Wesson (NASDAQ:SWBI) is a firearms manufacturer known for its handguns and rifles.
Why Are We Out on SWBI?
- Annual sales declines of 13.1% for the past five years show its products and services struggled to connect with the market
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 6.2% for the last two years
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Smith & Wesson is trading at $13.36 per share, or 28.7x forward P/E. Dive into our free research report to see why there are better opportunities than SWBI.
Hub Group (HUBG)
Market Cap: $2.40 billion
Started with $10,000, Hub Group (NASDAQ:HUBG) is a provider of intermodal, truck brokerage, and logistics services, facilitating transportation solutions for businesses worldwide.
Why Do We Steer Clear of HUBG?
- Annual sales declines of 9% for the past two years show its products and services struggled to connect with the market during this cycle
- Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 28% annually, worse than its revenue
- Eroding returns on capital suggest its historical profit centers are aging
At $39.98 per share, Hub Group trades at 20.1x forward P/E. To fully understand why you should be careful with HUBG, check out our full research report (it’s free).
ABM (ABM)
Market Cap: $2.73 billion
With roots dating back to 1909 as a window washing company, ABM Industries (NYSE:ABM) provides integrated facility management, infrastructure, and mobility solutions across various sectors including commercial, manufacturing, education, and aviation.
Why Do We Think Twice About ABM?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Earnings per share have contracted by 1.4% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Low free cash flow margin of 1.7% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
ABM’s stock price of $46.19 implies a valuation ratio of 11.3x forward P/E. Check out our free in-depth research report to learn more about why ABM doesn’t pass our bar.
Stocks We Like More
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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 Kadant (+214% between June 2020 and June 2025). Find your next big winner with StockStory today.