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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

Lamb Weston (LW)

Market Cap: $7.80 billion

Best known for its Grown in Idaho brand, Lamb Weston (NYSE: LW) produces and distributes potato products such as frozen french fries and mashed potatoes.

Why Are We Cautious About LW?

1. Sales are projected to remain flat over the next 12 months as demand decelerates from its three-year trend
2. Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 5 percentage points
3. Poor free cash flow margin for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

Lamb Weston’s stock price of $55.29 implies a valuation ratio of 16.1x forward P/E. To fully understand why you should be careful with LW, check out our full research report (it’s free).

TopBuild (BLD)

Market Cap: $8.54 billion

Established in 2015 following a spinoff from Masco Corporation, TopBuild (NYSE: BLD) is a distributor and installer of insulation and other building products.

Why Is BLD Not Exciting?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Sales are projected to tank by 2.6% over the next 12 months as demand evaporates
3. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 7.7% annually

TopBuild is trading at $300.44 per share, or 14.6x forward P/E. If you’re considering BLD for your portfolio, see our FREE research report to learn more.

First Horizon (FHN)

Market Cap: $9.87 billion

Tracing its roots back to 1864 during the Civil War era, First Horizon (NYSE: FHN) is a Tennessee-based bank holding company that provides commercial and consumer banking, wealth management, and specialty financial services across multiple states.

Why Are We Hesitant About FHN?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.7% annually over the last two years
2. Estimated net interest income growth of 2.8% for the next 12 months implies demand will slow from its four-year trend
3. Non-interest operating profits and efficiency rose over the last four years as it benefited from some fixed cost leverage

At $19.45 per share, First Horizon trades at 1.1x forward P/B. Read our free research report to see why you should think twice about including FHN in your portfolio.

High-Quality Stocks for All Market Conditions

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 9 Market-Beating Stocks. 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.