3 Small-Cap Stocks with Questionable Fundamentals

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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

A. O. Smith (AOS)

Market Cap: $9.14 billion

Credited with the invention of the glass-lined water heater, A.O. Smith (NYSE:AOS) manufactures water heating and treatment products for various industries.

Why Are We Hesitant About AOS?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.6%
3. Free cash flow margin dropped by 7.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up

A. O. Smith’s stock price of $64.30 implies a valuation ratio of 16.7x forward P/E. Read our free research report to see why you should think twice about including AOS in your portfolio.

Fastly (FSLY)

Market Cap: $1.11 billion

Founded in 2011, Fastly (NYSE:FSLY) provides content delivery and edge cloud computing services, enabling enterprises and developers to deliver fast, secure, and scalable digital content and experiences.

Why Is FSLY Risky?

1. 14.3% annual revenue growth over the last three years was slower than its software peers
2. Gross margin of 54% is way below its competitors, leaving less money to invest in areas like marketing and R&D
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

At $7.68 per share, Fastly trades at 1.8x forward price-to-sales. To fully understand why you should be careful with FSLY, check out our full research report (it’s free).

Dun & Bradstreet (DNB)

Market Cap: $4.03 billion

Known for its proprietary D-U-N-S Number that serves as a unique identifier for businesses worldwide, Dun & Bradstreet (NYSE:DNB) provides business decisioning data and analytics that help companies evaluate credit risks, verify suppliers, enhance sales productivity, and gain market visibility.

Why Do We Steer Clear of DNB?

1. Annual revenue growth of 3.7% over the last two years was below our standards for the business services sector
2. Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 5 percentage points
3. Flat earnings per share over the last four years underperformed the sector average

Dun & Bradstreet is trading at $9.03 per share, or 8.5x forward P/E. Check out our free in-depth research report to learn more about why DNB doesn’t pass our bar.

Stocks We Like More

Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.

While this has caused many investors to adopt a "fearful" wait-and-see approach, we’re leaning into our best ideas that can grow regardless of the political or macroeconomic climate. Take advantage of Mr. Market by checking out 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 183% over the last five years (as of March 31st 2025).

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-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today for free.