3 Small-Cap Stocks We Approach with Caution

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.

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.

Shoe Carnival (SCVL)

Market Cap: $557.6 million

Known for its playful atmosphere that features carnival elements, Shoe Carnival (NASDAQ:SCVL) is a retailer that sells footwear from mainstream brands for the entire family.

Why Do We Pass on SCVL?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Revenue base of $1.14 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
3. Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable

Shoe Carnival is trading at $20.39 per share, or 12.6x forward P/E. Read our free research report to see why you should think twice about including SCVL in your portfolio.

Hyster-Yale Materials Handling (HY)

Market Cap: $708.6 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 Sell HY?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 2% annually over the last two years
2. Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
3. Earnings per share fell by 2.6% annually over the last five years while its revenue grew, partly because it diluted shareholders

At $40.48 per share, Hyster-Yale Materials Handling trades at 15.4x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why HY doesn’t pass our bar.

Encore Capital Group (ECPG)

Market Cap: $1.28 billion

Operating in the often misunderstood world of debt collection since 1999, Encore Capital Group (NASDAQ:ECPG) purchases portfolios of defaulted consumer debt at deep discounts and works with individuals to recover these obligations while helping them toward financial recovery.

Why Do We Think Twice About ECPG?

1. Muted 1.3% annual revenue growth over the last five years shows its demand lagged behind its financials peers
2. Earnings per share fell by 15.9% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
3. 11× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Encore Capital Group’s stock price of $57.27 implies a valuation ratio of 7.8x forward P/E. To fully understand why you should be careful with ECPG, check out our full research report (it’s free).

Stocks We Like More

Your portfolio can’t afford to be based on yesterday’s story. The risk in a handful of heavily crowded stocks is rising daily.

The names generating the next wave of massive growth are right here 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.