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.
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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Pegasystems (PEGA)
Market Cap: $5.80 billion
With a "Center-out Business Architecture" approach that transcends organizational silos, Pegasystems (NASDAQ: PEGA) develops software that helps organizations automate workflows and use artificial intelligence to improve customer experiences and business processes.
Why Is PEGA Risky?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 5.1% underwhelmed
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 6.3 percentage points
Pegasystems’s stock price of $34.87 implies a valuation ratio of 3.1x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PEGA.
MarketAxess (MKTX)
Market Cap: $4.16 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 Is MKTX Not Exciting?
- Sales trends were unexciting over the last five years as its 4% annual growth was below the typical financials company
- Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
MarketAxess is trading at $116.91 per share, or 14.8x forward P/E. To fully understand why you should be careful with MKTX, check out our full research report (it’s free).
Enova (ENVA)
Market Cap: $4.21 billion
Pioneering online lending since 2004 with a massive database of over 65 terabytes of customer behavior data, Enova International (NYSE: ENVA) provides online financial services including installment loans and lines of credit to non-prime consumers and small businesses in the United States and Brazil.
Why Are We Hesitant About ENVA?
- Incremental sales over the last five years were less profitable as its 8.5% annual earnings per share growth lagged its revenue gains
- High net-debt-to-EBITDA ratio of 5× could force the company to raise capital on unfavorable terms if market conditions deteriorate
At $168.57 per share, Enova trades at 9.7x forward P/E. Check out our free in-depth research report to learn more about why ENVA doesn’t pass our bar.
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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.
