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.
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. That said, here are three small-cap stocks to pass on and some alternatives you should look into instead.
Latham (SWIM)
Market Cap: $707.1 million
Started as a family business, Latham (NASDAQ: SWIM) is a global designer and manufacturer of in-ground residential swimming pools and related products.
Why Is SWIM Risky?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 8.3 percentage points
- Rising returns on capital show management is making relatively better investments
Latham is trading at $6.01 per share, or 24x forward P/E. To fully understand why you should be careful with SWIM, check out our full research report (it’s free).
Werner (WERN)
Market Cap: $1.96 billion
Conducting business in over a 100 countries, Werner (NASDAQ: WERN) offers full-truckload, less-than-truckload, and intermodal delivery services.
Why Are We Bearish on WERN?
- Sales trends were unexciting over the last two years as its 1.3% annual growth was below the typical industrials company
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 39.2% annually while its revenue grew
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $32.72 per share, Werner trades at 19.2x forward P/E. Check out our free in-depth research report to learn more about why WERN doesn’t pass our bar.
Kodiak Gas Services (KGS)
Market Cap: $5.31 billion
Dominating the Permian Basin with a fleet focused on large horsepower units exceeding 1,000 horsepower each, Kodiak Gas Services (NYSE: KGS) operates compression equipment that maintains natural gas pressure for production, gathering, and transportation.
Why Are We Cautious About KGS?
- Modest revenue base of $1.39 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Efficiency has decreased over the last five years as its EBITDA margin fell by 2.3 percentage points
- Low free cash flow margin of 3.3% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Kodiak Gas Services’s stock price of $51.55 implies a valuation ratio of 19.6x forward P/E. To fully understand why you should be careful with KGS, check out our full research report (it’s free).
Stocks We Like More
ONE MORE THING: Top 5 Growth Stocks. The biggest stock winners almost always had one thing in common before they ran. Revenue growing like crazy. Meta. CrowdStrike. Broadcom. Our AI flagged all three. They returned 315%, 314%, and 455%, respectively.
Find out which 5 stocks it’s flagging this month — FREE. Get Our Top 5 Growth Stocks for Free HERE.
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 Tecnoglass (+1,552% between June 2020 and June 2025). Find your next big winner with StockStory today.
