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.

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

Sonos (SONO)

Market Cap: $1.79 billion

A pioneer in connected home audio systems, Sonos (NASDAQ: SONO) offers a range of premium wireless speakers and sound systems.

Why Do We Pass on SONO?

1. Muted 1.7% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 8.2% for the last two years
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

At $14.84 per share, Sonos trades at 17.3x forward P/E. To fully understand why you should be careful with SONO, check out our full research report (it’s free).

SiteOne (SITE)

Market Cap: $6.57 billion

Known for distributing John Deere tractors and LESCO turf care products, SiteOne Landscape Supply (NYSE: SITE) provides landscaping products and services to professionals, including irrigation, lighting, and nursery supplies.

Why Are We Wary of SITE?

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. Earnings per share fell by 4.9% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
3. Waning returns on capital imply its previous profit engines are losing steam

SiteOne’s stock price of $147.27 implies a valuation ratio of 34.1x forward P/E. If you’re considering SITE for your portfolio, see our FREE research report to learn more.

Mercury General (MCY)

Market Cap: $4.74 billion

Founded in 1961 and maintaining a network of over 6,300 independent agents across the country, Mercury General (NYSE: MCY) is an insurance company that primarily sells automobile insurance policies through independent agents in 11 states, with a strong focus on California.

Why Are We Hesitant About MCY?

1. Estimated sales growth of 2.4% for the next 12 months implies demand will slow from its two-year trend
2. 3.3% annual book value per share growth over the last five years was slower than its insurance peers
3. Below-average return on equity indicates management struggled to find compelling investment opportunities

Mercury General is trading at $85.45 per share, or 2x forward P/B. Dive into our free research report to see why there are better opportunities than MCY.

Stocks We Like More

Check out the high-quality names we’ve flagged in our Top 5 Strong Momentum 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 Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.