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.
Cogent (CCOI)
Market Cap: $804 million
Operating a massive network spanning 20,000 miles of fiber optic cable and connecting to over 3,200 buildings worldwide, Cogent Communications (NASDAQ:CCOI) provides high-speed Internet access, private network services, and data center colocation to businesses and bandwidth-intensive organizations across 54 countries.
Why Should You Dump CCOI?
- Sales tumbled by 4.1% annually over the last two years, showing market trends are working against it during this cycle
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $16.86 per share, Cogent trades at 9.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why CCOI doesn’t pass our bar.
Xerox (XRX)
Market Cap: $434.2 million
Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ:XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.
Why Is XRX Risky?
- Muted 1.5% annual revenue growth over the last five years shows its demand lagged behind its business services peers
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Xerox’s stock price of $3.32 implies a valuation ratio of 0.1x forward price-to-sales. Read our free research report to see why you should think twice about including XRX in your portfolio.
California Resources (CRC)
Market Cap: $5.18 billion
Operating some of California's most productive oil fields including Elk Hills and Belridge, California Resources (NYSE:CRC) explores for and produces crude oil, natural gas, and natural gas liquids from fields across California.
Why Are We Hesitant About CRC?
- Costs have risen faster than its revenue over the last five years, causing its EBITDA margin to decline by 31.2 percentage points
California Resources is trading at $58.35 per share, or 9.3x forward P/E. To fully understand why you should be careful with CRC, check out our full research report (it’s free).
Stocks We Like More
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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 Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today.