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 avoid and some other investments you should consider instead.
Qualys (QLYS)
Market Cap: $4.73 billion
Originally developed to address the growing complexity of IT security in the cloud era, Qualys (NASDAQ: QLYS) provides a cloud-based platform that helps organizations identify, manage, and protect their IT assets from cyber threats across on-premises, cloud, and mobile environments.
Why Do We Think Twice About QLYS?
- Underwhelming ARR growth of 9.6% over the last year suggests the company faced challenges in acquiring and retaining long-term customers
- Estimated sales growth of 6.8% for the next 12 months implies demand will slow from its two-year trend
- Operating margin didn’t move over the last year, showing it couldn’t increase its efficiency
Qualys’s stock price of $132.40 implies a valuation ratio of 7x forward price-to-sales. To fully understand why you should be careful with QLYS, check out our full research report (it’s free for active Edge members).
Upstart (UPST)
Market Cap: $5.00 billion
Using over 2,500 data variables and trained on nearly 82 million repayment events, Upstart (NASDAQ: UPST) is an AI-powered lending platform that uses machine learning to help banks and credit unions more accurately assess borrower risk for personal loans, auto loans, and home equity lines of credit.
Why Does UPST Give Us Pause?
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Upstart is trading at $52.02 per share, or 4.4x forward price-to-sales. If you’re considering UPST for your portfolio, see our FREE research report to learn more.
Edgewell Personal Care (EPC)
Market Cap: $949.7 million
Boasting brands such as Banana Boat, Schick, and Skintimate, Edgewell Personal Care (NYSE: EPC) sells personal care products in the skin and sun care, shave, and feminine care categories.
Why Should You Sell EPC?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Performance over the past three years shows each sale was less profitable, as its earnings per share fell by 2.6% annually
- Free cash flow margin dropped by 4.9 percentage points over the last year, implying the company became more capital intensive as competition picked up
At $20.44 per share, Edgewell Personal Care trades at 6.4x forward P/E. Check out our free in-depth research report to learn more about why EPC doesn’t pass our bar.
Stocks We Like More
Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.
The smart money is already positioning for the next leg up. Don’t miss out on the recovery - check out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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