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 avoid and some other investments you should consider instead.
The Trade Desk (TTD)
Market Cap: $6.29 billion
Built as an alternative to "walled garden" advertising ecosystems, The Trade Desk (NASDAQ:TTD) provides a cloud-based platform that helps advertisers and agencies plan, manage, and optimize digital advertising campaigns across multiple channels and devices.
Why Are We Hesitant About TTD?
- Average billings growth of 12.2% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales decline of 14.6% for the next 12 months implies a challenging demand environment
- Free cash flow margin is forecasted to shrink by 8.1 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
At $13.29 per share, The Trade Desk trades at 2.5x forward price-to-sales. If you’re considering TTD for your portfolio, see our FREE research report to learn more.
Peabody Energy (BTU)
Market Cap: $3.00 billion
Beginning with a single wagon hauling coal in Illinois back when Grover Cleveland was president, Peabody Energy (NYSE:BTU) mines coal used by electricity generators and steel manufacturers.
Why Do We Pass on BTU?
- Sales tumbled by 1.8% annually over the last ten years, showing market trends are working against it during this cycle
- Gross margin of 24.3% is below its competitors, leaving less money to invest in exploration and production
- Costs have risen faster than its revenue over the last five years, causing its EBITDA margin to decline by 33.3 percentage points
Peabody Energy is trading at $24.55 per share, or 3.5x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than BTU.
Kodiak Gas Services (KGS)
Market Cap: $6.22 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 Does KGS Give Us Pause?
- Revenue base of $1.39 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Efficiency has decreased over the last five years as its EBITDA margin fell by 2.3 percentage points
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Kodiak Gas Services’s stock price of $60.01 implies a valuation ratio of 22.1x forward P/E. To fully understand why you should be careful with KGS, check out our full research report (it’s free).
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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 Exlservice (+271% between June 2020 and June 2025). Find your next big winner with StockStory today.