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 pass on and some alternatives you should look into instead.
Genesis Energy (GEL)
Market Cap: $2.03 billion
Operating a 64% stake in the Poseidon Pipeline, one of the Gulf of Mexico's largest crude oil pipelines, Genesis Energy (NYSE: GEL) provides midstream services like pipeline transportation, storage, and processing for crude oil and natural gas producers and refiners.
Why Should You Sell GEL?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 25.8%
- High net-debt-to-EBITDA ratio of 5× could force the company to raise capital on unfavorable terms if market conditions deteriorate
Genesis Energy is trading at $16.57 per share, or 8.8x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why GEL doesn’t pass our bar.
SolarEdge (SEDG)
Market Cap: $2.00 billion
Established in 2006, SolarEdge (NASDAQ: SEDG) creates advanced systems to improve the efficiency of solar panels.
Why Are We Out on SEDG?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.4% annually over the last five years
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
SolarEdge’s stock price of $32.40 implies a valuation ratio of 92.1x forward P/E. To fully understand why you should be careful with SEDG, check out our full research report (it’s free).
Capital Southwest (CSWC)
Market Cap: $1.59 billion
Originally founded in 1961 as a venture capital investor that helped launch Texas Instruments, Capital Southwest (NASDAQ: CSWC) is a business development company that provides debt and equity financing to middle-market companies primarily in the United States.
Why Do We Pass on CSWC?
- Earnings per share fell by 6.2% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- ROE of 9.8% reflects management’s challenges in identifying attractive investment opportunities
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $25.35 per share, Capital Southwest trades at 11.2x forward P/E. If you’re considering CSWC for your portfolio, see our FREE research report to learn more.
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.
