Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.

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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

Bandwidth (BAND)

Market Cap: $428 million

Started in 1999 by David Morken who was later joined by Henry Kaestner as co-founder in 2001, Bandwidth (NASDAQ: BAND) provides thousands of customers with a software platform that uses its own global network to provide phone numbers, voice, and text connectivity.

Why Do We Steer Clear of BAND?

1. 13.9% annual revenue growth over the last three years was slower than its software peers
2. Estimated sales growth of 2.6% for the next 12 months implies demand will slow from its three-year trend
3. Sky-high servicing costs result in an inferior gross margin of 38% that must be offset through increased usage

Bandwidth is trading at $14.02 per share, or 0.5x forward price-to-sales. If you’re considering BAND for your portfolio, see our FREE research report to learn more.

Qualys (QLYS)

Market Cap: $4.96 billion

Founded in 1999 as one of the first subscription security companies, Qualys (NASDAQ: QLYS) provides organizations with software to assess their exposure to cyber-attacks.

Why Are We Wary of QLYS?

1. Products, pricing, or go-to-market strategy may need some adjustments as its 5.2% average billings growth over the last year was weak
2. Estimated sales growth of 6.6% for the next 12 months implies demand will slow from its three-year trend
3. Projected 6.9 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position

At $133.85 per share, Qualys trades at 7.6x forward price-to-sales. To fully understand why you should be careful with QLYS, check out our full research report (it’s free).

ANI Pharmaceuticals (ANIP)

Market Cap: $1.25 billion

With a diverse portfolio of 116 pharmaceutical products and a growing rare disease platform, ANI Pharmaceuticals (NASDAQ: ANIP) develops, manufactures, and markets branded and generic prescription pharmaceuticals, with a focus on rare disease treatments.

Why Does ANIP Worry Us?

1. Revenue base of $674.1 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
2. Efficiency has decreased over the last five years as its adjusted operating margin fell by 7 percentage points
3. Push for growth has led to negative returns on capital, signaling value destruction

ANI Pharmaceuticals’s stock price of $61.75 implies a valuation ratio of 9.7x forward P/E. Read our free research report to see why you should think twice about including ANIP in your portfolio.

High-Quality Stocks for All Market Conditions

The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.

While the crowd speculates what might happen next, we’re homing in on the companies that can succeed regardless of the political or macroeconomic environment. Put yourself in the driver’s seat and build a durable portfolio by checking out 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 176% over the last five years.

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today for free.