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.
PagerDuty (PD)
Market Cap: $836 million
Born from the frustration of developers being woken up by unprioritized alerts, PagerDuty (NYSE: PD) is a digital operations management platform that helps organizations detect and respond to IT incidents, outages, and other critical issues in real-time.
Why Is PD Risky?
- Average billings growth of 1.1% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 5.7 percentage points over the next year
At $10.54 per share, PagerDuty trades at 1.6x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PD.
Appian (APPN)
Market Cap: $1.91 billion
Powering billions of transactions daily since its founding in 1999, Appian (NASDAQ: APPN) provides a low-code platform that helps businesses automate complex processes and operationalize artificial intelligence without extensive programming knowledge.
Why Do We Think Twice About APPN?
- Estimated sales growth of 10.5% for the next 12 months implies demand will slow from its two-year trend
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Poor free cash flow margin of 8.4% for the last year limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Appian is trading at $25.54 per share, or 2.2x forward price-to-sales. Read our free research report to see why you should think twice about including APPN in your portfolio.
Alight (ALIT)
Market Cap: $549 million
Born from a corporate spinoff in 2017 to focus on employee experience technology, Alight (NYSE: ALIT) provides human capital management solutions that help companies administer employee benefits, payroll, and workforce management systems.
Why Do We Think ALIT Will Underperform?
- Sales tumbled by 3.8% annually over the last five years, showing market trends are working against it during this cycle
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Alight’s stock price of $20.81 implies a valuation ratio of 3.8x forward P/E. To fully understand why you should be careful with ALIT, check out our full research report (it’s free).
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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 Comfort Systems (+1,154% between June 2020 and June 2025). Find your next big winner with StockStory today.
