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.

Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

Varonis (VRNS)

Market Cap: $5.49 billion

Founded by a duo of former Israeli Defense Forces cyber warfare engineers, Varonis (NASDAQ: VRNS) offers software-as-service that helps customers protect data from cyber threats and gain visibility into how enterprise data is being used.

Why Do We Think Twice About VRNS?

1. Annual revenue growth of 11.7% over the last three years was below our standards for the software sector
2. Poor expense management has led to operating margin losses

Varonis is trading at $48.99 per share, or 8.6x forward price-to-sales. Read our free research report to see why you should think twice about including VRNS in your portfolio.

Northwest Pipe (NWPX)

Market Cap: $383.2 million

Playing a large role in the Integrated Pipeline (IPL) project in Texas to deliver ~350 million gallons of water per day, Northwest Pipe (NASDAQ: NWPX) is a manufacturer of pipeline systems for water infrastructure.

Why Does NWPX Give Us Pause?

1. Annual revenue growth of 5.2% over the last two years was below our standards for the industrials sector
2. Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
3. Earnings per share have dipped by 2.1% annually over the past two years, which is concerning because stock prices follow EPS over the long term

At $38.79 per share, Northwest Pipe trades at 11.3x forward P/E. Check out our free in-depth research report to learn more about why NWPX doesn’t pass our bar.

Enphase (ENPH)

Market Cap: $5.98 billion

The first company to successfully commercialize the solar micro-inverter, Enphase (NASDAQ: ENPH) manufactures software-driven home energy products.

Why Is ENPH Not Exciting?

1. Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Efficiency has decreased over the last five years as its operating margin fell by 23.7 percentage points
3. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term

Enphase’s stock price of $45.93 implies a valuation ratio of 13.6x forward P/E. If you’re considering ENPH for your portfolio, see our FREE research report to learn more.

Stocks We Like More

Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.

While this has caused many investors to adopt a "fearful" wait-and-see approach, we’re leaning into our best ideas that can grow regardless of the political or macroeconomic climate. Take advantage of Mr. Market by checking out our Top 5 Growth Stocks for this month. 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 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