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.
Health Catalyst (HCAT)
Market Cap: $135.5 million
Built on its "Health Catalyst Flywheel" methodology that emphasizes measurable outcomes, Health Catalyst (NASDAQ: HCAT) provides data and analytics technology and services that help healthcare organizations manage their data and drive measurable clinical, financial, and operational improvements.
Why Do We Think HCAT Will Underperform?
- Offerings couldn’t generate interest over the last year as its billings have averaged 14.4% declines
- Bad unit economics and steep infrastructure costs are reflected in its gross margin of 51.2%, one of the worst among software companies
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
At $1.79 per share, Health Catalyst trades at 0.6x forward price-to-sales. To fully understand why you should be careful with HCAT, check out our full research report (it’s free).
1-800-FLOWERS (FLWS)
Market Cap: $166.9 million
Founded in 1976, 1-800-FLOWERS (NASDAQ: FLWS) is an online retailer of flowers, gifts, and gourmet foods, serving customers globally.
Why Should You Sell FLWS?
- Products and services have few die-hard fans as sales have declined by 6.7% annually over the last five years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
1-800-FLOWERS is trading at $2.63 per share, or 30.3x forward EV-to-EBITDA. If you’re considering FLWS for your portfolio, see our FREE research report to learn more.
MarketAxess (MKTX)
Market Cap: $5.75 billion
Pioneering the shift from phone-based to electronic bond trading since 2000, MarketAxess (NASDAQ: MKTX) operates electronic trading platforms that enable institutional investors and broker-dealers to efficiently trade fixed-income securities like corporate and government bonds.
Why Are We Out on MKTX?
- 4.2% annual revenue growth over the last five years was slower than its financials peers
- Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
MarketAxess’s stock price of $163.30 implies a valuation ratio of 19.7x forward P/E. Check out our free in-depth research report to learn more about why MKTX doesn’t pass our bar.
Stocks We Like More
WHILE YOU’RE HERE: Top 9 Market-Beating Stocks. The best stocks don’t just beat the market once. They do it again. And again. Robust revenue growth, rising free cash flow, returns on capital that leave their competition in the dust. The market has already rewarded these businesses.
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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.
