Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.
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 pass on and some alternatives you should look into instead.
Simpson (SSD)
Market Cap: $7.17 billion
Aiming to build safer and stronger buildings, Simpson (NYSE: SSD) designs and manufactures structural connectors, anchors, and other construction products.
Why Are We Hesitant About SSD?
- Sales trends were unexciting over the last two years as its 4.7% annual growth was below the typical industrials company
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 4.7 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
Simpson’s stock price of $173.19 implies a valuation ratio of 18.7x forward P/E. Dive into our free research report to see why there are better opportunities than SSD.
Columbia Banking System (COLB)
Market Cap: $8.17 billion
Created through the merger of two Pacific Northwest banking institutions with deep regional roots, Columbia Banking System (NASDAQ: COLB) operates Umpqua Bank, providing commercial, consumer, and wealth management services across eight western states.
Why Are We Cautious About COLB?
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 4.4% annually while its revenue grew
- Loan losses and capital returns have eroded its tangible book value per share this cycle as its tangible book value per share declined by 1.7% annually over the last five years
- Estimated tangible book value per share growth of 6.3% for the next 12 months implies profitability will slow from its two-year trend
Columbia Banking System is trading at $28.89 per share, or 1.1x forward P/B. To fully understand why you should be careful with COLB, check out our full research report (it’s free).
PennyMac Financial Services (PFSI)
Market Cap: $3.26 billion
Founded during the 2008 financial crisis to help address the mortgage market meltdown, PennyMac Financial Services (NYSE: PFSI) is a specialty financial services company that originates, services, and manages investments related to residential mortgage loans in the United States.
Why Do We Steer Clear of PFSI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 11.8% annually over the last five years
- Net interest income tumbled by 27.5% annually over the last five years, showing market trends are working against it during this cycle
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
At $62.78 per share, PennyMac Financial Services trades at 0.7x forward P/B. Read our free research report to see why you should think twice about including PFSI in your portfolio.
Stocks We Like More
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI is taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
Our AI system flagged Palantir before it ran 1,662% between October 2022 and February 2026. AppLovin before it ran 753% between February 2024 and February 2026. Nvidia before it ran 1,178% between January 2023 and February 2026. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.
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.
