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.

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.

Kennametal (KMT)

Market Cap: $1.60 billion

Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE: KMT) is a provider of industrial materials and tools for various sectors.

Why Do We Think KMT Will Underperform?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Estimated sales growth of 1.4% for the next 12 months is soft and implies weaker demand
3. Earnings per share have dipped by 5.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term

At $21.08 per share, Kennametal trades at 14.4x forward P/E. Dive into our free research report to see why there are better opportunities than KMT.

Enphase (ENPH)

Market Cap: $4.88 billion

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

Why Does ENPH Give Us Pause?

1. Declining unit sales over the past two years suggest it might have to lower prices to accelerate growth
2. Efficiency has decreased over the last five years as its operating margin fell by 12 percentage points
3. Earnings per share have dipped by 27.3% annually over the past two years, which is concerning because stock prices follow EPS over the long term

Enphase is trading at $37.59 per share, or 15x forward P/E. If you’re considering ENPH for your portfolio, see our FREE research report to learn more.

Northwest Bancshares (NWBI)

Market Cap: $1.86 billion

Founded in 1896 and operating across Pennsylvania, New York, Ohio, and Indiana, Northwest Bancshares (NASDAQ: NWBI) is a bank holding company that operates Northwest Bank, providing personal and business banking, investment management, and trust services.

Why Are We Cautious About NWBI?

1. 5.9% annual net interest income growth over the last five years was slower than its banking peers
2. Capital trends were unexciting over the last five years as its 2.3% annual tangible book value per share growth was below the typical banking firm
3. Estimated tangible book value per share decline of 4.2% for the next 12 months implies a challenging profitability environment

Northwest Bancshares’s stock price of $12.70 implies a valuation ratio of 1x forward P/B. To fully understand why you should be careful with NWBI, check out our full research report (it’s free).

High-Quality Stocks for All Market Conditions

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