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.
Medifast (MED)
Market Cap: $109.8 million
Known for its Optavia program that combines portion-controlled meal replacements with coaching, Medifast (NYSE: MED) has a broad product portfolio of bars, snacks, drinks, and desserts for those looking to lose weight or consume healthier foods.
Why Should You Sell MED?
- Sales tumbled by 36% annually over the last three years, showing consumer trends are working against its favor
- Subscale operations are evident in its revenue base of $429.7 million, meaning it has fewer distribution channels than its larger rivals
- Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable
At $10.68 per share, Medifast trades at 0.4x forward price-to-sales. To fully understand why you should be careful with MED, check out our full research report (it’s free for active Edge members).
Quanex (NX)
Market Cap: $546.9 million
Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.
Why Does NX Worry Us?
- Earnings per share fell by 9.6% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Free cash flow margin shrank by 6.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Quanex’s stock price of $11.99 implies a valuation ratio of 6.1x forward P/E. Check out our free in-depth research report to learn more about why NX doesn’t pass our bar.
MillerKnoll (MLKN)
Market Cap: $1.04 billion
Created through the 2021 merger of industry icons Herman Miller and Knoll, MillerKnoll (NASDAQ: MLKN) designs, manufactures, and distributes interior furnishings for offices, healthcare facilities, educational settings, and homes worldwide.
Why Are We Out on MLKN?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.1% annually over the last two years
- Anticipated sales growth of 1.2% for the next year implies demand will be shaky
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 7.2% annually while its revenue grew
MillerKnoll is trading at $15.28 per share, or 7.9x forward P/E. If you’re considering MLKN for your portfolio, see our FREE research report to learn more.
Stocks We Like More
The market’s up big this year - but there’s a catch. Just 4 stocks account for half the S&P 500’s entire gain. That kind of concentration makes investors nervous, and for good reason. While everyone piles into the same crowded names, smart investors are hunting quality where no one’s looking - and paying a fraction of the price. Check out the high-quality names we’ve flagged in our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).
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-small-cap company Comfort Systems (+782% 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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