3 Small-Cap Stocks We're Skeptical Of

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.

Graham Corporation (GHM)

Market Cap: $786 million

Founded when its founder patented a unique design for a vacuum system used in the sugar refining process, Graham (NYSE:GHM) provides vacuum and heat transfer equipment for the energy, petrochemical, refining, and chemical sectors.

Why Are We Cautious About GHM?

1. Operating margin of 2.3% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
2. Low returns on capital reflect management’s struggle to allocate funds effectively
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

Graham Corporation is trading at $71.50 per share, or 48x forward P/E. Read our free research report to see why you should think twice about including GHM in your portfolio.

Hyster-Yale Materials Handling (HY)

Market Cap: $549.7 million

Playing a significant role in the development of the hydraulic lift truck, Hyster-Yale (NYSE:HY) designs, manufactures, and sells materials handling equipment to various sectors.

Why Should You Dump HY?

1. Annual sales declines of 2% for the past two years show its products and services struggled to connect with the market during this cycle
2. Projected sales decline of 6.4% over the next 12 months indicates demand will continue deteriorating
3. Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 2.6% annually

At $31.03 per share, Hyster-Yale Materials Handling trades at 12.9x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than HY.

Amdocs (DOX)

Market Cap: $8.82 billion

Powering the digital experiences of approximately 400 communications companies worldwide, Amdocs (NASDAQ:DOX) provides software and services that help telecommunications and media companies manage customer relationships, monetize services, and automate network operations.

Why Do We Pass on DOX?

1. Sales pipeline suggests its future revenue growth likely won’t meet our standards as its backlog hasn’t budged over the past two years
2. Projected sales growth of 3.3% for the next 12 months suggests sluggish demand
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 2.4 percentage points

Amdocs’s stock price of $81.72 implies a valuation ratio of 10.9x forward P/E. To fully understand why you should be careful with DOX, check out our full research report (it’s free for active Edge members).

Stocks We Like More

The market’s up big this year - but there’s a catch. Just 4 stocks account for half the S&P 500’s entire gain. That kind of concentration makes investors nervous, and for good reason. While everyone piles into the same crowded names, smart investors are hunting quality where no one’s looking - and paying a fraction of the price. Check out the high-quality names we’ve flagged in our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).

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 for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today.