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.

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

Pegasystems (PEGA)

Market Cap: $10.06 billion

Founded by Alan Trefler in 1983, Pegasystems (NASDAQ: PEGA) offers a software-as-a-service platform to automate and optimize workflows in customer service and engagement.

Why Does PEGA Worry Us?

1. Sales trends were unexciting over the last three years as its 11.1% annual growth was below the typical software company
2. Estimated sales growth of 3.3% for the next 12 months implies demand will slow from its three-year trend
3. Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment

Pegasystems’s stock price of $58.50 implies a valuation ratio of 6.2x forward price-to-sales. Check out our free in-depth research report to learn more about why PEGA doesn’t pass our bar.

Stratasys (SSYS)

Market Cap: $913.5 million

Born from the Founder’s idea of making a toy frog with a glue gun, Stratasys (NASDAQ: SSYS) offers 3D printers and related materials, software, and services to many industries.

Why Should You Dump SSYS?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 1.7% annually over the last five years
2. Performance over the past five years was negatively impacted by new share issuances as its earnings per share dropped by 13.6% annually, worse than its revenue
3. Cash burn makes us question whether it can achieve sustainable long-term growth

At $11.00 per share, Stratasys trades at 34.5x forward P/E. Read our free research report to see why you should think twice about including SSYS in your portfolio.

American Outdoor Brands (AOUT)

Market Cap: $123.5 million

Spun off from Smith and Wesson in 2020, American Outdoor Brands (NASDAQ: AOUT) is an outdoor and recreational products company that offers outdoor and shooting sports products but does not sell firearms themselves.

Why Is AOUT Risky?

1. Sales trends were unexciting over the last five years as its 5.8% annual growth was below the typical consumer discretionary company
2. Earnings per share have dipped by 23.9% annually over the past four years, which is concerning because stock prices follow EPS over the long term
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

American Outdoor Brands is trading at $9.49 per share, or 16.5x forward P/E. To fully understand why you should be careful with AOUT, check out our full research report (it’s free).

Stocks We Like More

Trump’s April 2025 tariff bombshell triggered a massive market selloff, but stocks have since staged an impressive recovery, leaving those who panic sold on the sidelines.

Take advantage of the rebound 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-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today for free.

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