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.
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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Alta (ALTG)
Market Cap: $206.5 million
Founded in 1984, Alta Equipment Group (NYSE:ALTG) is a provider of industrial and construction equipment and services across the Midwest and Northeast United States.
Why Should You Sell ALTG?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.6% annually over the last two years
- Historically negative EPS raises concerns for risk-averse investors and makes its earnings potential harder to gauge
- High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Alta’s stock price of $6.32 implies a valuation ratio of 5.8x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why ALTG doesn’t pass our bar.
RXO (RXO)
Market Cap: $4.77 billion
With access to millions of trucks, RXO (NYSE:RXO) offers full-truckload, less-than-truckload, and last-mile deliveries.
Why Are We Out on RXO?
- Declining unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.3 percentage points
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $28.61 per share, RXO trades at 79.9x forward P/E. If you’re considering RXO for your portfolio, see our FREE research report to learn more.
Walker & Dunlop (WD)
Market Cap: $1.18 billion
Originating as a small mortgage banking firm during the Great Depression in 1937, Walker & Dunlop (NYSE:WD) provides commercial real estate financing, property sales, appraisal, and investment management services with a focus on multifamily properties.
Why Do We Steer Clear of WD?
- Customers borrowed less money this cycle as its net interest income declined by 41.6% annually over the last five years
- Earnings per share fell by 13.7% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Products and services are facing significant credit quality challenges during this cycle as tangible book value per share has declined by 8.5% annually over the last five years
Walker & Dunlop is trading at $34.41 per share, or 0.7x forward P/B. To fully understand why you should be careful with WD, check out our full research report (it’s free).
Stocks We Like More
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+271% between June 2020 and June 2025). Find your next big winner with StockStory today.