3 Small-Cap Stocks with Warning Signs

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 swipe left on and some alternatives you should look into instead.

Neogen (NEOG)

Market Cap: $1.10 billion

Founded in 1981 and operating at the intersection of food safety and animal health, Neogen (NASDAQ:NEOG) develops and manufactures diagnostic tests and related products to detect dangerous substances in food and pharmaceuticals for animal health.

Why Are We Out on NEOG?

1. Annual revenue growth of 4.3% over the last two years was below our standards for the healthcare sector
2. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Neogen is trading at $5.05 per share, or 13.9x forward P/E. Read our free research report to see why you should think twice about including NEOG in your portfolio.

TowneBank (TOWN)

Market Cap: $2.62 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 Does TOWN Worry Us?

1. Annual net interest income growth of 4.2% over the last four years was below our standards for the bank sector
2. Net interest margin of 3% is well below other banks, signaling its loans aren’t very profitable
3. Operational productivity has decreased over the last four years as its efficiency ratio worsened by 13.6 percentage points

At $35.30 per share, TowneBank trades at 1.2x forward P/B. To fully understand why you should be careful with TOWN, check out our full research report (it’s free).

TFS Financial (TFSL)

Market Cap: $3.54 billion

Tracing its roots back to 1938 during the Great Depression era when savings and loans were vital to homeownership, TFS Financial (NASDAQ:TFSL) is a savings and loan holding company that provides mortgage lending, deposit services, and other retail banking products primarily in Ohio and Florida.

Why Do We Pass on TFSL?

1. 4.9% annual net interest income growth over the last four years was slower than its bank peers
2. Net interest margin of 1.7% reflects its high servicing and capital costs
3. Capital trends were unexciting over the last two years as its 1.4% annual tangible book value per share growth was below the typical bank company

TFS Financial’s stock price of $12.71 implies a valuation ratio of 1.9x forward P/B. If you’re considering TFSL for your portfolio, see our FREE research report to learn more.

High-Quality Stocks for All Market Conditions

Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.

The smart money is already positioning for the next leg up. Don’t miss out on the recovery - check out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today

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