3 Small-Cap Stocks We're Skeptical Of

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.

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 avoid and some other investments you should consider instead.

Mercury Systems (MRCY)

Market Cap: $4.82 billion

Founded in 1981, Mercury Systems (NASDAQ:MRCY) specializes in providing processing subsystems and components for primarily defense applications.

Why Should You Sell MRCY?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 5.4 percentage points
3. Earnings per share fell by 16.7% annually over the last five years while its revenue grew, partly because it diluted shareholders

Mercury Systems’s stock price of $80.34 implies a valuation ratio of 76.2x forward P/E. Dive into our free research report to see why there are better opportunities than MRCY.

Assured Guaranty (AGO)

Market Cap: $3.99 billion

Serving as a financial safety net for over $11 trillion in debt service payments since its founding in 2003, Assured Guaranty (NYSE:AGO) provides credit protection products that guarantee scheduled payments on municipal bonds, infrastructure projects, and structured finance obligations.

Why Is AGO Risky?

1. 3.6% annual declines in net premiums earned for the past five years indicates policy sales struggled this cycle
2. Forecasted revenue decline of 20% for the upcoming 12 months implies demand will fall even further
3. Underwhelming 7.8% return on equity reflects management’s difficulties in finding profitable growth opportunities

Assured Guaranty is trading at $86.63 per share, or 0.7x forward P/B. If you’re considering AGO for your portfolio, see our FREE research report to learn more.

Flagstar Financial (FLG)

Market Cap: $5.81 billion

Tracing its roots back to 1859 and rebranded from New York Community Bancorp in 2024, Flagstar Financial (NYSE:FLG) is a bank holding company that offers commercial and consumer banking services, with specialties in multi-family lending, mortgage originations, and warehouse lending.

Why Do We Steer Clear of FLG?

1. Muted 9.4% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
2. Day-to-day expenses have swelled relative to revenue over the last four years as its efficiency ratio increased by 51.7 percentage points
3. Earnings per share fell by 16.4% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable

At $13.94 per share, Flagstar Financial trades at 0.8x forward P/B. Read our free research report to see why you should think twice about including FLG in your portfolio.

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 9 Market-Beating Stocks. 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.