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.
These trade-offs can cause headaches for even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Trex (TREX)
Market Cap: $6.42 billion
Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE: TREX) makes wood-alternative decking, railing, and patio furniture.
Why Do We Think Twice About TREX?
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 3.3 percentage points
- Free cash flow margin shrank by 5.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $59.88 per share, Trex trades at 24.9x forward P/E. Check out our free in-depth research report to learn more about why TREX doesn’t pass our bar.
Vontier (VNT)
Market Cap: $6.27 billion
A spin-off of a spin-off, Vontier (NYSE: VNT) provides electronic products and systems to the transportation, automotive, and manufacturing sectors.
Why Should You Sell VNT?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
Vontier is trading at $42.75 per share, or 13.1x forward P/E. To fully understand why you should be careful with VNT, check out our full research report (it’s free).
Brookline Bancorp (BRKL)
Market Cap: $2.14 billion
Founded in 1871 and operating through three subsidiary banks across three states, Brookline Bancorp (NASDAQ: BRKL) is a multi-bank holding company that provides commercial, business, and retail banking services to small and mid-sized businesses and individuals in New England and New York.
Why Are We Cautious About BRKL?
- Annual net interest income growth of 6.7% over the last five years was below our standards for the banking sector
- Net interest margin shrank by 27 basis points (100 basis points = 1 percentage point) over the last two years, suggesting the profitability of its loan book is decreasing or the market is becoming more competitive
- Sales over the last two years were less profitable as its earnings per share fell by 16.1% annually while its revenue was flat
Brookline Bancorp’s stock price of $11.05 implies a valuation ratio of 0.2x forward P/B. Read our free research report to see why you should think twice about including BRKL in your portfolio.
Stocks We Like More
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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. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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