Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.
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.
Alarm.com (ALRM)
Market Cap: $2.70 billion
Processing over 325 billion data points annually from more than 150 million connected devices, Alarm.com (NASDAQ:ALRM) provides cloud-based platforms that enable residential and commercial property owners to remotely monitor and control their security, video, energy, and other connected devices.
Why Should You Sell ALRM?
- Average billings growth of 8.4% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales growth of 3.5% for the next 12 months implies demand will slow from its two-year trend
- Operating margin didn’t move over the last year, showing it couldn’t increase its efficiency
Alarm.com’s stock price of $54.54 implies a valuation ratio of 2.8x forward price-to-sales. To fully understand why you should be careful with ALRM, check out our full research report (it’s free).
The Marzetti Company (MZTI)
Market Cap: $3.02 billion
Known for its frozen garlic bread and Parkerhouse rolls, The Marzetti Company (NASDAQ:MZTI) sells bread, dressing, and dips to the retail and food service channels.
Why Are We Wary of MZTI?
- Sales trends were unexciting over the last three years as its 1.8% annual growth was below the typical consumer staples company
- Smaller revenue base of $1.92 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 23.5% that must be offset through higher volumes
The Marzetti Company is trading at $110.17 per share, or 15.1x forward P/E. Read our free research report to see why you should think twice about including MZTI in your portfolio.
Viavi Solutions (VIAV)
Market Cap: $8.60 billion
Once known as JDS Uniphase before its 2015 rebranding, Viavi Solutions (NASDAQ:VIAV) provides testing, monitoring and assurance solutions for telecommunications, cloud, enterprise, military, and other critical networks and infrastructure.
Why Does VIAV Fall Short?
- 3.4% annual revenue growth over the last five years was slower than its industrials peers
- Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $35.10 per share, Viavi Solutions trades at 31.1x forward P/E. Check out our free in-depth research report to learn more about why VIAV doesn’t pass our bar.
Stocks We Like More
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI is taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
Our AI system flagged Palantir before it ran 1,662% between October 2022 and February 2026. AppLovin before it ran 753% between February 2024 and February 2026. Nvidia before it ran 1,178% between January 2023 and February 2026. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.
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-micro-cap company Kadant (+214% between June 2020 and June 2025). Find your next big winner with StockStory today.