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.

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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.

CAVA (CAVA)

Market Cap: $7.38 billion

Starting from a single Washington, D.C. location, CAVA (NYSE: CAVA) operates a fast-casual restaurant chain offering customizable Mediterranean-inspired dishes.

Why Are We Wary of CAVA?

1. Subpar operating margin of 4.6% constrains its ability to invest in process improvements or effectively respond to new competitive threats
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
3. Negative returns on capital show management lost money while trying to expand the business

CAVA’s stock price of $63.75 implies a valuation ratio of 122.2x forward P/E. Check out our free in-depth research report to learn more about why CAVA doesn’t pass our bar.

Matrix Service (MTRX)

Market Cap: $319 million

Founded in Oklahoma, Matrix Service (NASDAQ: MTRX) provides engineering, fabrication, construction, and maintenance services primarily to the energy and industrial markets.

Why Are We Hesitant About MTRX?

1. 1.1% annual revenue growth over the last five years was slower than its industrials peers
2. Gross margin of 3.7% reflects its high production costs
3. Issuance of new shares over the last five years caused its earnings per share to fall by 21.4% annually while its revenue grew

At $11.35 per share, Matrix Service trades at 17.2x forward P/E. To fully understand why you should be careful with MTRX, check out our full research report (it’s free).

Acadia Healthcare (ACHC)

Market Cap: $1.47 billion

With a network of over 250 facilities serving patients in 38 states and Puerto Rico, Acadia Healthcare (NASDAQ: ACHC) operates facilities providing mental health and substance use disorder treatment services across the United States.

Why Do We Think Twice About ACHC?

1. Underwhelming admissions over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 5.2 percentage points
3. 21.7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

Acadia Healthcare is trading at $16.00 per share, or 10.1x forward P/E. If you’re considering ACHC for your portfolio, see our FREE research report to learn more.

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 5 Growth Stocks for this month. 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.