3 Small-Cap Stocks in the Doghouse

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.

PagerDuty (PD)

Market Cap: $1.53 billion

Started by three former Amazon engineers, PagerDuty (NYSE:PD) is a software-as-a-service platform that helps companies respond to IT incidents fast and make sure that any downtime is minimized.

Why Is PD Not Exciting?

1. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 8.1% underwhelmed
2. Historical operating losses point to an inefficient cost structure
3. Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 3.3 percentage points over the next year

PagerDuty is trading at $16.78 per share, or 3x forward price-to-sales. Read our free research report to see why you should think twice about including PD in your portfolio.

Dropbox (DBX)

Market Cap: $8.29 billion

Founded by the long-serving CEO Drew Houston and Arash Ferdowsi in 2007, Dropbox (NASDAQ:DBX) provides a file hosting cloud platform that helps organizations collaborate and share documents.

Why Does DBX Give Us Pause?

1. Billings didn’t grow over the last year, suggesting the company struggled to sell its software and might have to lower prices to stimulate growth
2. Forecasted revenue decline of 2.7% for the upcoming 12 months implies demand will fall off a cliff
3. Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 3 percentage points

At $29.10 per share, Dropbox trades at 3.5x forward price-to-sales. Dive into our free research report to see why there are better opportunities than DBX.

First Watch (FWRG)

Market Cap: $1.04 billion

Based on a nautical reference to the first work shift aboard a ship, First Watch (NASDAQ:FWRG) is a chain of breakfast and brunch restaurants whose menu is heavily-focused on eggs and griddle items such as pancakes.

Why Are We Cautious About FWRG?

1. Long-term business health is up for debate as its cash burn has increased over the last year
2. Below-average returns on capital indicate management struggled to find compelling investment opportunities
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

First Watch’s stock price of $17.05 implies a valuation ratio of 43.5x forward P/E. To fully understand why you should be careful with FWRG, check out our full research report (it’s free).

Stocks We Like More

Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.

While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like 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 176% over the last five years.

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today for free.