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.
These trade-offs can cause headaches for even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
ACV Auctions (ACVA)
Market Cap: $1.37 billion
Founded in 2014, ACV Auctions (NASDAQ: ACVA) is an online auction marketplace for car dealers and wholesalers to buy and sell used cars.
Why Are We Cautious About ACVA?
- Gross margin of 27.4% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Excessive marketing spend signals little organic demand and traction for its platform
- Poor free cash flow margin of 4.1% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
ACV Auctions’s stock price of $7.94 implies a valuation ratio of 18.6x forward EV/EBITDA. If you’re considering ACVA for your portfolio, see our FREE research report to learn more.
La-Z-Boy (LZB)
Market Cap: $1.61 billion
The prized possession of every mancave, La-Z-Boy (NYSE: LZB) is a furniture company specializing in recliners, sofas, and seats.
Why Is LZB Risky?
- Annual revenue growth of 5.8% over the last five years was below our standards for the consumer discretionary sector
- Free cash flow margin is expected to remain in place over the coming year
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
La-Z-Boy is trading at $39.09 per share, or 13.9x forward P/E. Dive into our free research report to see why there are better opportunities than LZB.
Taylor Morrison Home (TMHC)
Market Cap: $6.00 billion
Named “America’s Most Trusted Home Builder” in 2019, Taylor Morrison Home (NYSE: TMHC) builds single family homes and communities across the United States.
Why Do We Think Twice About TMHC?
- Backlog has dropped by 14.5% on average over the past two years, suggesting it’s losing orders as competition picks up
- Projected sales decline of 13.6% for the next 12 months points to a tough demand environment ahead
- Earnings per share lagged its peers over the last two years as they only grew by 2.6% annually
At $61.44 per share, Taylor Morrison Home trades at 9.5x forward P/E. To fully understand why you should be careful with TMHC, check out our full research report (it’s free for active Edge members).
High-Quality Stocks for All Market Conditions
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 6 Stocks for this week. 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 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.
