Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.
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.
Proto Labs (PRLB)
Market cap: $1.86 billion
Pioneering the concept of online quoting and manufacturing for custom prototypes and low-volume production parts, Proto Labs (NYSE: PRLB) offers injection molding, 3D printing, and sheet metal fabrication for manufacturers in various industries.
Why Does PRLB Worry Us?
- Annual revenue growth of 4.3% over the last five years was below our standards for the industrials sector
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- Negative returns on capital show management lost money while trying to expand the business
At $77.73 per share, Proto Labs trades at 38.6x forward P/E. If you’re considering PRLB for your portfolio, see our FREE research report to learn more.
Azenta (AZTA)
Market cap: $1.81 billion
Serving as the guardian of some of medicine's most valuable materials, Azenta (NASDAQ: AZTA) provides biological sample management, storage, and genomic services that help pharmaceutical and biotechnology companies preserve and analyze critical research materials.
Why Do We Think AZTA Will Underperform?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.5% annually over the last two years
- Earnings per share have contracted by 28.6% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Cash burn makes us question whether it can achieve sustainable long-term growth
Azenta is trading at $37.50 per share, or 86.1x forward P/E. Dive into our free research report to see why there are better opportunities than AZTA.
Nelnet (NNI)
Market cap: $4.42 billion
Starting as a student loan servicer in the 1970s and evolving through the changing landscape of education finance, Nelnet (NYSE: NNI) provides student loan servicing, education technology, payment processing, and banking services while managing a portfolio of education loans.
Why Does NNI Fall Short?
- Muted 3.6% annual revenue growth over the last five years shows its demand lagged behind its financials peers
- Earnings per share fell by 8.3% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- High net-debt-to-EBITDA ratio of 17× could force the company to raise capital on unfavorable terms if market conditions deteriorate
Nelnet’s stock price of $123.57 implies a valuation ratio of 14.8x forward P/E. Check out our free in-depth research report to learn more about why NNI doesn’t pass our bar.
High-quality stocks for all market conditions
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+214% between June 2020 and June 2025). Find your next big winner with StockStory today.
