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

Beacon Roofing Supply (BECN)

Market Cap: $7.72 billion

Established in 1928, Beacon Roofing Supply (NASDAQ: BECN) distributes residential and commercial roofing materials and complementary building products.

Why Does BECN Worry Us?

1. Estimated sales growth of 4.3% for the next 12 months implies demand will slow from its two-year trend
2. Earnings per share have dipped by 4.6% annually over the past two years, which is concerning because stock prices follow EPS over the long term
3. Free cash flow margin dropped by 5.4 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Beacon Roofing Supply is trading at $124.22 per share, or 15.6x forward P/E. Read our free research report to see why you should think twice about including BECN in your portfolio.

Alight (ALIT)

Market Cap: $2.81 billion

Born from a corporate spinoff in 2017 to focus on employee experience technology, Alight (NYSE: ALIT) provides human capital management solutions that help companies administer employee benefits, payroll, and workforce management systems.

Why Do We Avoid ALIT?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 1.9% annually over the last five years
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. Underwhelming 0.6% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam

At $5.32 per share, Alight trades at 8.4x forward P/E. Dive into our free research report to see why there are better opportunities than ALIT.

Connection (CNXN)

Market Cap: $1.64 billion

Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ: CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.

Why Is CNXN Risky?

1. Sales stagnated over the last five years and signal the need for new growth strategies
2. Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 1% annually
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

Connection’s stock price of $64.43 implies a valuation ratio of 18.4x forward P/E. To fully understand why you should be careful with CNXN, check out our full research report (it’s free).

High-Quality Stocks for All Market Conditions

Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.

While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like 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 183% over the last five years (as of March 31st 2025).

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 Kadant (+351% five-year return). Find your next big winner with StockStory today for free.