3 Small-Cap Stocks We Think Twice About

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. That said, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.

Penguin Solutions (PENG)

Market Cap: $1.06 billion

Based in the US, Penguin Solutions (NASDAQ:PENG) is a diversified semiconductor company offering memory, digital, and LED products.

Why Do We Pass on PENG?

1. Muted 4% annual revenue growth over the last five years shows its demand lagged behind its semiconductor peers
2. High input costs result in an inferior gross margin of 29.1% that must be offset through higher volumes
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

At $20.08 per share, Penguin Solutions trades at 9.8x forward P/E. Read our free research report to see why you should think twice about including PENG in your portfolio.

BJ's (BJRI)

Market Cap: $840.5 million

Founded in 1978 in California, BJ’s Restaurants (NASDAQ:BJRI) is a chain of restaurants whose menu features classic American dishes, often with a twist.

Why Do We Think BJRI Will Underperform?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
2. Challenging supply chain dynamics and bad unit economics are reflected in its low gross margin of 14.7%
3. Underwhelming 3% return on capital reflects management’s difficulties in finding profitable growth opportunities

BJ's is trading at $39.76 per share, or 18.4x forward P/E. Check out our free in-depth research report to learn more about why BJRI doesn’t pass our bar.

3D Systems (DDD)

Market Cap: $229.2 million

Founded by the inventor of stereolithography, 3D Systems (NYSE:DDD) engineers, manufactures, and sells 3D printers and other related products to the aerospace, automotive, healthcare, and consumer goods industries.

Why Should You Dump DDD?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 6.7% annually over the last five years
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. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

3D Systems’s stock price of $1.79 implies a valuation ratio of 0.6x forward price-to-sales. To fully understand why you should be careful with DDD, check out our full research report (it’s free for active Edge members).

High-Quality Stocks for All Market Conditions

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 Growth Stocks for this month. 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 Kadant (+351% 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.