3 Small-Cap Stocks We Think Twice About

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.

Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. Keeping that in mind, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.

Paycom (PAYC)

Market Cap: $8.39 billion

Pioneering the concept of employees doing their own payroll with its "Beti" technology, Paycom (NYSE:PAYC) provides cloud-based human capital management software that helps businesses manage the entire employment lifecycle from recruitment to retirement.

Why Does PAYC Worry Us?

1. Products, pricing, or go-to-market strategy may need some adjustments as its 9.5% average billings growth over the last year was weak
2. Projected sales growth of 9.5% for the next 12 months suggests sluggish demand
3. Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 4.6 percentage points

Paycom’s stock price of $156.50 implies a valuation ratio of 4x forward price-to-sales. Check out our free in-depth research report to learn more about why PAYC doesn’t pass our bar.

CarMax (KMX)

Market Cap: $6.88 billion

Known for its transparent, customer-centric approach and wide selection of vehicles, Carmax (NYSE:KMX) is the largest automotive retailer in the United States.

Why Are We Out on KMX?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
2. Gross margin of 11% is an output of its commoditized inventory
3. High net-debt-to-EBITDA ratio of 16× increases the risk of forced asset sales or dilutive financing if operational performance weakens

CarMax is trading at $48.43 per share, or 20.2x forward P/E. Read our free research report to see why you should think twice about including KMX in your portfolio.

Korn Ferry (KFY)

Market Cap: $3.59 billion

With clients including 97% of the S&P 100 and operations in 103 offices across 51 countries, Korn Ferry (NYSE:KFY) is a global consulting firm that helps organizations design optimal structures, recruit talent, develop leaders, and create effective compensation strategies.

Why Are We Hesitant About KFY?

1. Flat sales over the last two years suggest it must find different ways to grow during this cycle
2. Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 3.3 percentage points
3. Eroding returns on capital suggest its historical profit centers are aging

At $68.75 per share, Korn Ferry trades at 12.5x forward P/E. To fully understand why you should be careful with KFY, check out our full research report (it’s free).

Stocks We Like More

If your portfolio success hinges on just 4 stocks, your wealth is built on fragile ground. You have a small window to secure high-quality assets before the market widens and these prices disappear.

Don’t wait for the next volatility shock. Check out 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.