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.

Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

ADT (ADT)

Market Cap: $6.60 billion

Founded in 1874 and headquartered in Boca Raton, Florida, ADT (NYSE: ADT) is a provider of security, automation, and smart home solutions, offering comprehensive services for home and business protection.

Why Should You Sell ADT?

1. Number of customers has disappointed over the past two years, indicating weak demand for its offerings
2. Projected 2.2 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
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

At $8.12 per share, ADT trades at 8.7x forward P/E. Check out our free in-depth research report to learn more about why ADT doesn’t pass our bar.

Lumen (LUMN)

Market Cap: $9.37 billion

With approximately 350,000 route miles of fiber optic cable spanning North America and the Asia Pacific, Lumen Technologies (NYSE: LUMN) operates a vast fiber optic network that provides communications, cloud connectivity, security, and IT solutions to businesses and consumers.

Why Is LUMN Risky?

1. Annual sales declines of 9.5% for the past five years show its products and services struggled to connect with the market during this cycle
2. Free cash flow margin dropped by 6.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Lumen is trading at $9.18 per share, or 2.5x forward EV-to-EBITDA. To fully understand why you should be careful with LUMN, check out our full research report (it’s free for active Edge members).

Mercury General (MCY)

Market Cap: $5.07 billion

Founded in 1961 and maintaining a network of over 6,300 independent agents across the country, Mercury General (NYSE: MCY) is an insurance company that primarily sells automobile insurance policies through independent agents in 11 states, with a strong focus on California.

Why Are We Wary of MCY?

1. Estimated sales growth of 2.4% for the next 12 months implies demand will slow from its two-year trend
2. Annual book value per share growth of 3.3% over the last five years was below our standards for the insurance sector
3. Below-average return on equity indicates management struggled to find compelling investment opportunities

Mercury General’s stock price of $91.50 implies a valuation ratio of 2.2x forward P/B. If you’re considering MCY for your portfolio, see our FREE research report to learn more.

High-Quality Stocks for All Market Conditions

If your portfolio success hinges on just 4 stocks, your wealth is built on fragile ground. You have a small window to secure high-quality assets before the market widens and these prices disappear.

Don’t wait for the next volatility shock. Check out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).

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 for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today

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