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.

nLIGHT (LASR)

Market Cap: $853.3 million

Founded by a former CEO and Harvard-educated entrepreneur Scott Keeneyn, nLIGHT (NASDAQ: LASR) offers semiconductor and fiber lasers to the industrial, aerospace & defense, and medical sectors.

Why Do We Pass on LASR?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 5.8% annually over the last two years
2. 5.7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

nLIGHT is trading at $17.25 per share, or 3.8x forward price-to-sales. Read our free research report to see why you should think twice about including LASR in your portfolio.

MRC Global (MRC)

Market Cap: $1.11 billion

Producing bomb casings and tracks for vehicles during WWII, MRC (NYSE: MRC) offers pipes, valves, and fitting products for various industries.

Why Is MRC Risky?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 2.9% annually over the last five years
2. Earnings per share have dipped by 33.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
3. ROIC of 0.9% reflects management’s challenges in identifying attractive investment opportunities

At $12.94 per share, MRC Global trades at 11x forward P/E. Check out our free in-depth research report to learn more about why MRC doesn’t pass our bar.

Ziff Davis (ZD)

Market Cap: $1.44 billion

Originally a pioneering technology publisher founded in 1927 that became famous for PC Magazine, Ziff Davis (NASDAQ: ZD) operates a portfolio of digital media brands and subscription services across technology, shopping, gaming, healthcare, and cybersecurity markets.

Why Do We Avoid ZD?

1. Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
2. Earnings per share fell by 1.6% annually over the last five years while its revenue was flat, showing each sale was less profitable
3. Free cash flow margin dropped by 17.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Ziff Davis’s stock price of $34.26 implies a valuation ratio of 4.8x forward P/E. To fully understand why you should be careful with ZD, check out our full research report (it’s free).

Stocks We Like More

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 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.