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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
OneWater (ONEW)
Market Cap: $184.2 million
A public company since early 2020, OneWater Marine (NASDAQ: ONEW) sells boats, yachts, and other marine products.
Why Is ONEW Risky?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Incremental sales over the last three years were much less profitable as its earnings per share fell by 53.6% annually while its revenue grew
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
OneWater’s stock price of $11.20 implies a valuation ratio of 45.1x forward P/E. Check out our free in-depth research report to learn more about why ONEW doesn’t pass our bar.
MDU Resources (MDU)
Market Cap: $4.26 billion
Founded to provide electricity to towns in Minnesota, MDU Resources (NYSE: MDU) provides products and services in the utilities and construction materials industries.
Why Should You Dump MDU?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 19.5% annually over the last five years
- Earnings per share have dipped by 15.9% annually over the past four years, which is concerning because stock prices follow EPS over the long term
- Free cash flow margin shrank by 13 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
MDU Resources is trading at $20.64 per share, or 21.7x forward P/E. Read our free research report to see why you should think twice about including MDU in your portfolio.
TowneBank (TOWN)
Market Cap: $3.15 billion
Founded in 1998 with a commitment to community-centered banking in the Hampton Roads region, TowneBank (NASDAQ: TOWN) is a community-focused financial institution providing banking, lending, and wealth management services to individuals and businesses in Virginia and North Carolina.
Why Do We Think Twice About TOWN?
- 5.1% annual revenue growth over the last five years was slower than its banking peers
- Annual net interest income growth of 9.9% over the last five years was below our standards for the banking sector
- Estimated tangible book value per share growth of 2% for the next 12 months implies profitability will slow from its two-year trend
At $34.47 per share, TowneBank trades at 1.1x forward P/B. To fully understand why you should be careful with TOWN, check out our full research report (it’s free).
Stocks We Like More
ALSO WORTH WATCHING: Top 5 Momentum Stocks. The best time to own a great stock is when the market is finally noticing it. These aren't just high-quality businesses. Something is happening with them right now. Elite fundamentals meeting near-term momentum — both boxes checked at the same time.
Find out which stocks our AI platform is flagging this week. See this week's Strong Momentum stocks — FREE. Get Our Strong Momentum Stocks for Free HERE.
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 Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today.
