3 Small-Cap Stocks with Questionable Fundamentals

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.

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 avoid and some other investments you should consider instead.

Applied Industrial (AIT)

Market Cap: $9.91 billion

Formerly called The Ohio Ball Bearing Company, Applied Industrial (NYSE:AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.

Why Is AIT Not Exciting?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Anticipated sales growth of 6.1% for the next year implies demand will be shaky
3. Earnings growth underperformed the sector average over the last two years as its EPS grew by just 7% annually

Applied Industrial’s stock price of $262.58 implies a valuation ratio of 24.6x forward P/E. Read our free research report to see why you should think twice about including AIT in your portfolio.

Enovis (ENOV)

Market Cap: $1.90 billion

With a focus on helping patients regain or maintain their natural motion, Enovis (NYSE:ENOV) develops and manufactures medical devices for orthopedic care, from injury prevention and pain management to joint replacement and rehabilitation.

Why Do We Avoid ENOV?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 7.1% annually over the last five years
2. Negative returns on capital show management lost money while trying to expand the business, and its falling returns suggest its earlier profit pools are drying up
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

At $33.50 per share, Enovis trades at 10.7x forward P/E. If you’re considering ENOV for your portfolio, see our FREE research report to learn more.

Stewart Information Services (STC)

Market Cap: $2.03 billion

Founded in 1893 during America's westward expansion when property records were often disputed, Stewart Information Services (NYSE:STC) provides title insurance and real estate services, helping homebuyers, sellers, and lenders verify property ownership and protect against title defects.

Why Are We Hesitant About STC?

1. Growth in insurance policies was lackluster over the last two years as its 1.3% annual growth underperformed the typical financial institution
2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 1% annually while its revenue grew
3. Muted 1.6% annual book value per share growth over the last two years shows its capital generation lagged behind its insurance peers

Stewart Information Services is trading at $72.54 per share, or 1.4x forward P/B. Check out our free in-depth research report to learn more about why STC doesn’t pass our bar.

High-Quality Stocks for All Market Conditions

Trump’s April 2025 tariff bombshell triggered a massive market selloff, but stocks have since staged an impressive recovery, leaving those who panic sold on the sidelines.

Take advantage of the rebound by checking out our Top 9 Market-Beating Stocks. 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 Exlservice (+354% 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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