3 Small-Cap Stocks We Approach with Caution

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. Keeping that in mind, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.

Mayville Engineering (MEC)

Market Cap: $360.2 million

Originally founded solely on tool and die manufacturing, Mayville Engineering Company (NYSE:MEC) specializes in metal fabrication, tube bending, and welding to be used in various industries.

Why Are We Wary of MEC?

1. Annual sales declines of 3.1% for the past two years show its products and services struggled to connect with the market during this cycle
2. High input costs result in an inferior gross margin of 12.8% that must be offset through higher volumes
3. Earnings per share have contracted by 52.4% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance

Mayville Engineering is trading at $17.71 per share, or 80.9x forward P/E. If you’re considering MEC for your portfolio, see our FREE research report to learn more.

Trex (TREX)

Market Cap: $3.92 billion

Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE:TREX) makes wood-alternative decking, railing, and patio furniture.

Why Do We Pass on TREX?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Free cash flow margin shrank by 6.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Trex’s stock price of $36.54 implies a valuation ratio of 23.9x forward P/E. Check out our free in-depth research report to learn more about why TREX doesn’t pass our bar.

Organon (OGN)

Market Cap: $2.13 billion

Spun off from Merck in 2021 to create a company dedicated to addressing unmet needs in women's health, Organon (NYSE:OGN) is a global healthcare company focused on improving women's health through prescription therapies, medical devices, biosimilars, and established medicines.

Why Does OGN Worry Us?

1. Sales tumbled by 1.7% annually over the last five years, showing market trends are working against its favor during this cycle
2. Sales were less profitable over the last five years as its earnings per share fell by 17.6% annually, worse than its revenue declines
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 24.8 percentage points

At $8.18 per share, Organon trades at 2.1x forward P/E. To fully understand why you should be careful with OGN, check out our full research report (it’s free for active Edge members).

High-Quality Stocks for All Market Conditions

Check out the high-quality names we’ve flagged in our Top 6 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.