3 Small-Cap Stocks That Concern Us

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.

The Honest Company (HNST)

Market Cap: $328.4 million

Co-founded by actress Jessica Alba, The Honest Company (NASDAQ:HNST) sells diapers and wipes, skin care products, and household cleaning products.

Why Do We Think HNST Will Underperform?

1. Sales trends were unexciting over the last three years as its 5.8% annual growth was below the typical consumer staples company
2. Subscale operations are evident in its revenue base of $371.3 million, meaning it has fewer distribution channels than its larger rivals
3. Negative returns on capital show management lost money while trying to expand the business

The Honest Company is trading at $2.92 per share, or 31.7x forward P/E. To fully understand why you should be careful with HNST, check out our full research report (it’s free).

MasterCraft (MCFT)

Market Cap: $333.8 million

Started by a waterskiing instructor, MasterCraft (NASDAQ:MCFT) specializes in designing, manufacturing, and selling sport boats.

Why Should You Sell MCFT?

1. Performance surrounding its boats sold has lagged its peers
2. Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 1.9 percentage points over the next year
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

MasterCraft’s stock price of $20.49 implies a valuation ratio of 13.6x forward P/E. Check out our free in-depth research report to learn more about why MCFT doesn’t pass our bar.

Redwire (RDW)

Market Cap: $1.73 billion

Based in Jacksonville, Florida, Redwire (NYSE:RDW) is a provider of systems and components used in space infrastructure.

Why Does RDW Give Us Pause?

1. Historically negative EPS raises concerns for risk-averse investors and makes its earnings potential harder to gauge
2. 28.2 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

At $9.06 per share, Redwire trades at 7,614x forward EV-to-EBITDA. If you’re considering RDW for your portfolio, see our FREE research report to learn more.

High-Quality Stocks for All Market Conditions

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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.