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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
PubMatic (PUBM)
Market Cap: $851.1 million
Powering billions of daily ad impressions across the open internet, PubMatic (NASDAQ: PUBM) operates a technology platform that helps publishers maximize revenue from their digital advertising inventory while giving advertisers more control and transparency.
Why Do We Avoid PUBM?
- Competitive market dynamics make it difficult to retain customers, leading to a weak 96% net revenue retention rate
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 18.1 percentage points over the next year
PubMatic’s stock price of $18.47 implies a valuation ratio of 2.7x forward price-to-sales. To fully understand why you should be careful with PUBM, check out our full research report (it’s free).
Vital Farms (VITL)
Market Cap: $405.1 million
With an emphasis on ethically produced products, Vital Farms (NASDAQ: VITL) specializes in pasture-raised eggs and butter.
Why Do We Think VITL Will Underperform?
- Efficiency has decreased over the last year as its operating margin fell by 10.3 percentage points
- Incremental sales over the last three years were much less profitable as its earnings per share fell by 17.2% annually while its revenue grew
- Free cash flow margin dropped by 13.6 percentage points over the last year, implying the company became more capital intensive as competition picked up
Vital Farms is trading at $9.44 per share, or 13.2x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including VITL in your portfolio.
Dolby Laboratories (DLB)
Market Cap: $5.47 billion
Known for its iconic "D" logo that appears before countless movies and TV shows, Dolby Laboratories (NYSE: DLB) designs and licenses audio and video technologies that enhance entertainment experiences in movies, TV shows, music, and other media.
Why Are We Bearish on DLB?
- 1.3% annual revenue growth over the last five years was slower than its software peers
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 3.3 percentage points
At $58.49 per share, Dolby Laboratories trades at 3.8x forward price-to-sales. To fully understand why you should be careful with DLB, check out our full research report (it’s free).
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-small-cap company Exlservice (+271% between June 2020 and June 2025). Find your next big winner with StockStory today.
