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.
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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Grocery Outlet (GO)
Market Cap: $926.4 million
Due to its differentiated procurement and buying approach, Grocery Outlet (NASDAQ:GO) is a discount grocery store chain that offers substantial discounts on name-brand products.
Why Should You Dump GO?
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 30.3%
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Grocery Outlet’s stock price of $9.45 implies a valuation ratio of 11.7x forward P/E. Check out our free in-depth research report to learn more about why GO doesn’t pass our bar.
Graphic Packaging Holding (GPK)
Market Cap: $4.29 billion
Founded in 1991, Graphic Packaging (NYSE:GPK) is a provider of paper-based packaging solutions for a wide range of products.
Why Is GPK Risky?
- Declining unit sales over the past two years suggest it might have to lower prices to accelerate growth
- Projected sales decline of 1.3% over the next 12 months indicates demand will continue deteriorating
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
Graphic Packaging Holding is trading at $14.56 per share, or 8.8x forward P/E. To fully understand why you should be careful with GPK, check out our full research report (it’s free).
LifeStance Health Group (LFST)
Market Cap: $2.75 billion
With over 6,600 licensed mental health professionals treating more than 880,000 patients annually, LifeStance Health (NASDAQ:LFST) provides outpatient mental health services through a network of clinicians offering psychiatric evaluations, psychological testing, and therapy across 33 states.
Why Does LFST Worry Us?
- Revenue base of $1.37 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Poor free cash flow margin of -0.5% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Negative returns on capital show management lost money while trying to expand the business
At $7.08 per share, LifeStance Health Group trades at 30.8x forward P/E. Dive into our free research report to see why there are better opportunities than LFST.
Stocks We Like More
If your portfolio success hinges on just 4 stocks, your wealth is built on fragile ground. You have a small window to secure high-quality assets before the market widens and these prices disappear.
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).
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-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today.