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.
American Eagle (AEO)
Market Cap: $4.55 billion
With a heavy focus on denim, American Eagle Outfitters (NYSE:AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.
Why Does AEO Fall Short?
- Sales trends were unexciting over the last three years as its 2.2% annual growth was below the typical consumer retail company
- Limited expansion of stores suggests it’s prioritizing efficiency over growth at this stage
- Underwhelming 9% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its decreasing returns suggest its historical profit centers are aging
American Eagle’s stock price of $27.11 implies a valuation ratio of 16.7x forward P/E. Read our free research report to see why you should think twice about including AEO in your portfolio.
Fortrea (FTRE)
Market Cap: $1.54 billion
Spun off from Labcorp in 2023 to focus exclusively on clinical research services, Fortrea (NASDAQ:FTRE) is a contract research organization that helps pharmaceutical, biotech, and medical device companies develop and bring their products to market through clinical trials and support services.
Why Do We Pass on FTRE?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.6% annually over the last four years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Fortrea is trading at $16.63 per share, or 24.8x forward P/E. Dive into our free research report to see why there are better opportunities than FTRE.
Insperity (NSP)
Market Cap: $1.60 billion
Pioneering the professional employer organization (PEO) industry it helped establish, Insperity (NYSE:NSP) provides human resources outsourcing services to small and medium-sized businesses, handling payroll, benefits, compliance, and HR administration.
Why Is NSP Risky?
- Muted 2.8% annual revenue growth over the last two years shows its demand lagged behind its business services peers
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 18.7% annually while its revenue grew
- Free cash flow margin dropped by 4.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $42.38 per share, Insperity trades at 21.7x forward P/E. To fully understand why you should be careful with NSP, check out our full research report (it’s free for active Edge members).
Stocks We Like More
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Don’t wait for the next volatility shock. Check 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 244% over the last five years (as of June 30, 2025).
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