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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Arhaus (ARHS)
Market Cap: $1.14 billion
With an aesthetic that features natural materials such as reclaimed wood, Arhaus (NASDAQ:ARHS) is a high-end furniture retailer that sells everything from sofas to rugs to bookcases.
Why Are We Hesitant About ARHS?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Modest revenue base of $1.38 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Earnings per share fell by 22% annually over the last three years while its revenue grew, partly because it diluted shareholders
Arhaus is trading at $8.07 per share, or 15.3x forward P/E. Dive into our free research report to see why there are better opportunities than ARHS.
RadNet (RDNT)
Market Cap: $4.49 billion
With over 350 imaging facilities across seven states and a growing artificial intelligence division, RadNet (NASDAQ:RDNT) operates a network of outpatient diagnostic imaging centers across the United States, offering services like MRI, CT scans, PET scans, mammography, and X-rays.
Why Are We Wary of RDNT?
- Subscale operations are evident in its revenue base of $2.04 billion, meaning it has fewer distribution channels than its larger rivals
- Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 3 percentage points
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $60.00 per share, RadNet trades at 101.1x forward P/E. Check out our free in-depth research report to learn more about why RDNT doesn’t pass our bar.
Select Water Solutions (WTTR)
Market Cap: $1.83 billion
Managing over 24 billion barrels of produced water annually across major U.S. shale plays, Select Water Solutions (NYSE:WTTR) provides water sourcing, recycling, disposal, and treatment services for oil and gas producers.
Why Are We Cautious About WTTR?
- Subscale operations are evident in its revenue base of $1.41 billion, meaning it has fewer distribution channels than its larger rivals
- Gross margin of 22.8% is below its competitors, leaving less money to invest in exploration and production
- Poor free cash flow margin of 1.2% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Select Water Solutions’s stock price of $15.48 implies a valuation ratio of 43.4x forward P/E. If you’re considering WTTR for your portfolio, see our FREE research report to learn more.
Stocks We Like More
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
Our AI system flagged Palantir before it ran 1,662%. AppLovin before it ran 753%. Nvidia before it ran 1,178%. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.
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.