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. Keeping that in mind, here are three small-cap stocks to pass on and some alternatives you should look into instead.
First American Financial (FAF)
Market Cap: $7.48 billion
Tracing its roots back to 1889 when California was experiencing its first major real estate boom, First American Financial (NYSE: FAF) provides title insurance, settlement services, and risk solutions for residential and commercial real estate transactions across the United States and internationally.
Why Is FAF Not Exciting?
- Insurance policy sales contracted this cycle as net premiums earned decreased by 1.9% annually over the last five years
- Earnings per share were flat over the last five years and fell short of the peer group average
- 2.8% annual book value per share growth over the last five years was slower than its insurance peers
First American Financial’s stock price of $73.83 implies a valuation ratio of 1.2x forward P/B. Read our free research report to see why you should think twice about including FAF in your portfolio.
Comstock Resources (CRK)
Market Cap: $4.16 billion
Operating in the Haynesville shale where a single well can produce millions of cubic feet of gas daily, Comstock Resources (NYSE: CRK) drills for and produces natural gas from underground shale rock formations in Louisiana and Texas.
Why Do We Pass on CRK?
- Annual revenue growth of 3.7% over the last five years was below our standards for the energy upstream and integrated energy sector
- Efficiency has decreased over the last five years as its EBITDA margin fell by 9.1 percentage points
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
Comstock Resources is trading at $14.51 per share, or 23.2x forward P/E. If you’re considering CRK for your portfolio, see our FREE research report to learn more.
ProPetro (PUMP)
Market Cap: $1.30 billion
Operating exclusively in the Permian Basin—one of America's most prolific oil-producing regions—ProPetro (NYSE: PUMP) provides hydraulic fracturing services that pump high-pressure fluid and sand into oil wells to release trapped hydrocarbons.
Why Are We Out on PUMP?
- Modest revenue base of $1.16 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Costly operations and weak unit economics result in an inferior gross margin of 27.3% that must be offset through higher production volumes
- Costs have risen faster than its revenue over the last five years, causing its EBITDA margin to decline by 5.9 percentage points
At $10.75 per share, ProPetro trades at 56.9x forward P/E. Dive into our free research report to see why there are better opportunities than PUMP.
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-small-cap company Comfort Systems (+1,154% between June 2020 and June 2025). Find your next big winner with StockStory today.
