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.
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.
Health Catalyst (HCAT)
Market Cap: $117.7 million
Built on its "Health Catalyst Flywheel" methodology that emphasizes measurable outcomes, Health Catalyst (NASDAQ:HCAT) provides data and analytics technology and services that help healthcare organizations manage their data and drive measurable clinical, financial, and operational improvements.
Why Should You Sell HCAT?
- Average billings growth of 4% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
- Negative free cash flow raises questions about the return timeline for its investments
Health Catalyst’s stock price of $1.60 implies a valuation ratio of 0.4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than HCAT.
Mayville Engineering (MEC)
Market Cap: $462.2 million
Originally founded solely on tool and die manufacturing, Mayville Engineering Company (NYSE:MEC) specializes in metal fabrication, tube bending, and welding to be used in various industries.
Why Is MEC Not Exciting?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.3% annually over the last two years
- Earnings per share have dipped by 42.7% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $22 per share, Mayville Engineering trades at 34.1x forward P/E. Read our free research report to see why you should think twice about including MEC in your portfolio.
German American Bancorp (GABC)
Market Cap: $1.63 billion
Founded in 1910 during a wave of community banking expansion in the Midwest, German American Bancorp (NASDAQ:GABC) is a financial holding company that provides banking, wealth management, and insurance services across southern Indiana and Kentucky.
Why Does GABC Worry Us?
- Efficiency ratio is projected to stay flat over the coming year, suggesting its fixed cost leverage is currently maxed out
- Annual earnings per share growth of 2% underperformed its revenue over the last two years, showing its incremental sales were less profitable
- 1.5% annual tangible book value per share growth over the last five years was slower than its banking peers
German American Bancorp is trading at $43.45 per share, or 1.3x forward P/B. To fully understand why you should be careful with GABC, check out our full research report (it’s free).
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 (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today.