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.

Medifast (MED)

Market Cap: $109.8 million

Known for its Optavia program that combines portion-controlled meal replacements with coaching, Medifast (NYSE: MED) has a broad product portfolio of bars, snacks, drinks, and desserts for those looking to lose weight or consume healthier foods.

Why Should You Sell MED?

1. Sales tumbled by 36% annually over the last three years, showing consumer trends are working against its favor
2. Subscale operations are evident in its revenue base of $429.7 million, meaning it has fewer distribution channels than its larger rivals
3. Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable

At $10.68 per share, Medifast trades at 0.4x forward price-to-sales. To fully understand why you should be careful with MED, check out our full research report (it’s free for active Edge members).

Quanex (NX)

Market Cap: $546.9 million

Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.

Why Does NX Worry Us?

1. Earnings per share fell by 9.6% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
2. Free cash flow margin shrank by 6.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Quanex’s stock price of $11.99 implies a valuation ratio of 6.1x forward P/E. Check out our free in-depth research report to learn more about why NX doesn’t pass our bar.

MillerKnoll (MLKN)

Market Cap: $1.04 billion

Created through the 2021 merger of industry icons Herman Miller and Knoll, MillerKnoll (NASDAQ: MLKN) designs, manufactures, and distributes interior furnishings for offices, healthcare facilities, educational settings, and homes worldwide.

Why Are We Out on MLKN?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.1% annually over the last two years
2. Anticipated sales growth of 1.2% for the next year implies demand will be shaky
3. Incremental sales over the last five years were much less profitable as its earnings per share fell by 7.2% annually while its revenue grew

MillerKnoll is trading at $15.28 per share, or 7.9x forward P/E. If you’re considering MLKN for your portfolio, see our FREE research report to learn more.

Stocks We Like More

The market’s up big this year - but there’s a catch. Just 4 stocks account for half the S&P 500’s entire gain. That kind of concentration makes investors nervous, and for good reason. While everyone piles into the same crowded names, smart investors are hunting quality where no one’s looking - and paying a fraction of the price. Check out the high-quality names we’ve flagged in 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 Comfort Systems (+782% 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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