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.

Semrush (SEMR)

Market Cap: $1.79 billion

Born from the need to make sense of the complex digital marketing landscape, Semrush (NYSE: SEMR) is a software-as-a-service platform that helps companies improve their online visibility, analyze digital marketing efforts, and optimize content across search engines and social media.

Why Are We Wary of SEMR?

1. Below-average net revenue retention rate of 106% suggests it has some trouble expanding within existing accounts
2. Operating margin declined by 4.3 percentage points over the last year as it scaled
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 9.7% for the last year

Semrush is trading at $11.92 per share, or 3.6x forward price-to-sales. If you’re considering SEMR for your portfolio, see our FREE research report to learn more.

Revolve (RVLV)

Market Cap: $1.64 billion

Launched in 2003 by software engineers Michael Mente and Mike Karanikolas, Revolve (NASDAQ: RVLV) is a fashion retailer leveraging social media and a community of fashion influencers to drive its merchandising strategy.

Why Do We Pass on RVLV?

1. White space opportunities may be dwindling as its growth in active customers averaged a weak 5.4%
2. Expensive marketing campaigns hurt its profitability and make us wonder what would happen if it let up on the gas
3. Earnings per share were flat over the last three years and fell short of the peer group average

Revolve’s stock price of $22.92 implies a valuation ratio of 14.3x forward EV/EBITDA. Check out our free in-depth research report to learn more about why RVLV doesn’t pass our bar.

Quanex (NX)

Market Cap: $766.9 million

Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.

Why Are We Cautious About NX?

1. Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 17.6 percentage points
2. Earnings per share fell by 12.6% annually over the last two years while its revenue grew, partly because it diluted shareholders
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $16.87 per share, Quanex trades at 8.7x forward P/E. Dive into our free research report to see why there are better opportunities than NX.

Stocks We Like More

WHILE YOU’RE HERE: Top 9 Market-Beating Stocks. The best stocks don't just beat the market once. They do it again. And again. Robust revenue growth, rising free cash flow, returns on capital that leave their competition in the dust. The market has already rewarded these businesses.

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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.