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.

These trade-offs can cause headaches for even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.

Sensata Technologies (ST)

Market Cap: $3.93 billion

Originally a temperature sensor control maker and a subsidiary of Texas Instruments for 60 years, Sensata Technology Holdings (NYSE: ST) is a leading supplier of analog sensors used in industrial and transportation applications, best known for its dominant position in the tire pressure monitoring systems in cars.

Why Do We Pass on ST?

1. Muted 2.7% annual revenue growth over the last five years shows its demand lagged behind its semiconductor peers
2. Sales are projected to tank by 3.4% over the next 12 months as its demand continues evaporating
3. Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 10.3 percentage points

At $26.87 per share, Sensata Technologies trades at 8.4x forward P/E. Dive into our free research report to see why there are better opportunities than ST.

MSC Industrial (MSM)

Market Cap: $4.53 billion

Founded in NYC’s Little Italy, MSC Industrial Direct (NYSE: MSM) provides industrial supplies and equipment, offering vast and reliable selection for customers such as contractors

Why Should You Dump MSM?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Projected sales for the next 12 months are flat and suggest demand will be subdued
3. Earnings per share fell by 4.5% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable

MSC Industrial is trading at $81.21 per share, or 21.1x forward P/E. To fully understand why you should be careful with MSM, check out our full research report (it’s free).

Mercury Systems (MRCY)

Market Cap: $2.87 billion

Founded in 1981, Mercury Systems (NASDAQ: MRCY) specializes in providing processing subsystems and components for primarily defense applications.

Why Is MRCY Risky?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Issuance of new shares over the last five years caused its earnings per share to fall by 28% annually while its revenue grew
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Mercury Systems’s stock price of $48.68 implies a valuation ratio of 68.6x forward P/E. Read our free research report to see why you should think twice about including MRCY 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 6 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.