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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Calavo (CVGW)
Market Cap: $469.6 million
A trailblazer in the avocado industry, Calavo Growers (NASDAQ:CVGW) is a pioneering California-based provider of high-quality avocados and other fresh food products.
Why Are We Out on CVGW?
- Sales tumbled by 16.3% annually over the last three years, showing consumer trends are working against its favor
- Sales are projected to tank by 16.1% over the next 12 months as its demand continues evaporating
- Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 10.4% that must be offset through higher volumes
Calavo is trading at $26.29 per share, or 17.7x forward P/E. If you’re considering CVGW for your portfolio, see our FREE research report to learn more.
A. O. Smith (AOS)
Market Cap: $9.07 billion
Credited with the invention of the glass-lined water heater, A.O. Smith (NYSE:AOS) manufactures water heating and treatment products for various industries.
Why Does AOS Give Us Pause?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Earnings per share lagged its peers over the last two years as they only grew by 2.2% annually
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $65.52 per share, A. O. Smith trades at 16.7x forward P/E. Dive into our free research report to see why there are better opportunities than AOS.
Penske Automotive Group (PAG)
Market Cap: $9.79 billion
With a diverse global network spanning the US, UK, Canada, Germany, Italy, Japan, and Australia, Penske Automotive Group (NYSE:PAG) operates automotive and commercial truck dealerships across the globe, selling new and used vehicles while providing service, parts, and financing options.
Why Do We Pass on PAG?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Widely-available products (and therefore stiff competition) result in an inferior gross margin of 13% that must be offset through higher volumes
- Incremental sales over the last three years were much less profitable as its earnings per share fell by 10.5% annually while its revenue grew
Penske Automotive Group’s stock price of $150.25 implies a valuation ratio of 11x forward P/E. Check out our free in-depth research report to learn more about why PAG doesn’t pass our bar.
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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 Exlservice (+354% five-year return). Find your next big winner with StockStory today.