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.

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.

Arhaus (ARHS)

Market Cap: $1.14 billion

With an aesthetic that features natural materials such as reclaimed wood, Arhaus (NASDAQ: ARHS) is a high-end furniture retailer that sells everything from sofas to rugs to bookcases.

Why Are We Hesitant About ARHS?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Modest revenue base of $1.38 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
3. Earnings per share fell by 22% annually over the last three years while its revenue grew, partly because it diluted shareholders

Arhaus is trading at $8.07 per share, or 15.3x forward P/E. Dive into our free research report to see why there are better opportunities than ARHS.

RadNet (RDNT)

Market Cap: $4.49 billion

With over 350 imaging facilities across seven states and a growing artificial intelligence division, RadNet (NASDAQ: RDNT) operates a network of outpatient diagnostic imaging centers across the United States, offering services like MRI, CT scans, PET scans, mammography, and X-rays.

Why Are We Wary of RDNT?

1. Subscale operations are evident in its revenue base of $2.04 billion, meaning it has fewer distribution channels than its larger rivals
2. Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 3 percentage points
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

At $60.00 per share, RadNet trades at 101.1x forward P/E. Check out our free in-depth research report to learn more about why RDNT doesn’t pass our bar.

Select Water Solutions (WTTR)

Market Cap: $1.83 billion

Managing over 24 billion barrels of produced water annually across major U.S. shale plays, Select Water Solutions (NYSE: WTTR) provides water sourcing, recycling, disposal, and treatment services for oil and gas producers.

Why Are We Cautious About WTTR?

1. Subscale operations are evident in its revenue base of $1.41 billion, meaning it has fewer distribution channels than its larger rivals
2. Gross margin of 22.8% is below its competitors, leaving less money to invest in exploration and production
3. Poor free cash flow margin of 1.2% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

Select Water Solutions’s stock price of $15.48 implies a valuation ratio of 43.4x forward P/E. If you’re considering WTTR for your portfolio, see our FREE research report to learn more.

Stocks We Like More

ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.

Our AI system flagged Palantir before it ran 1,662%. AppLovin before it ran 753%. Nvidia before it ran 1,178%. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.

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.