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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Array (ARRY)
Market Cap: $807.6 million
Going public in October 2020, Array (NASDAQ:ARRY) is a global manufacturer of ground-mounting tracking systems for utility and distributed generation solar energy projects.
Why Do We Think ARRY Will Underperform?
- Muted 3.7% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Issuance of new shares over the last five years caused its earnings per share to fall by 3.1% annually while its revenue grew
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Array’s stock price of $5.27 implies a valuation ratio of 6.6x forward P/E. Check out our free in-depth research report to learn more about why ARRY doesn’t pass our bar.
Ducommun (DCO)
Market Cap: $3.04 billion
California’s oldest company, Ducommun (NYSE:DCO) is a provider of engineering and manufacturing services for high-performance products primarily within the aerospace and defense industries.
Why Do We Think Twice About DCO?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 16% declines over the past two years
- Efficiency has decreased over the last five years as its operating margin fell by 8.9 percentage points
- Low returns on capital reflect management’s struggle to allocate funds effectively
Ducommun is trading at $201.44 per share, or 40.5x forward P/E. Dive into our free research report to see why there are better opportunities than DCO.
Dolby Laboratories (DLB)
Market Cap: $5.71 billion
Known for its iconic "D" logo that appears before countless movies and TV shows, Dolby Laboratories (NYSE:DLB) designs and licenses audio and video technologies that enhance entertainment experiences in movies, TV shows, music, and other media.
Why Do We Avoid DLB?
- Annual revenue growth of 1.3% over the last five years was well below our standards for the software sector
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 3.3 percentage points
At $60.94 per share, Dolby Laboratories trades at 4x forward price-to-sales. If you’re considering DLB for your portfolio, see our FREE research report to learn 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-micro-cap company Kadant (+214% between June 2020 and June 2025). Find your next big winner with StockStory today.