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.
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.
Elastic (ESTC)
Market Cap: $5.58 billion
Built on the powerful open-source Elasticsearch technology that powers search functionality for thousands of websites worldwide, Elastic (NYSE: ESTC) provides a search and AI platform that helps organizations find insights from their data, monitor applications, and protect against security threats.
Why Does ESTC Fall Short?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 12.5% underwhelmed
- Estimated sales growth of 13.6% for the next 12 months implies demand will slow from its two-year trend
- Operating margin expanded by 4.5 percentage points over the last year as it scaled and became more efficient
Elastic is trading at $53.63 per share, or 2.8x forward price-to-sales. Dive into our free research report to see why there are better opportunities than ESTC.
C3.ai (AI)
Market Cap: $1.27 billion
Named after the three Cs of its original focus—carbon, cloud computing, and customer relationship management—C3.ai (NYSE: AI) provides enterprise AI software that helps organizations develop, deploy, and operate large-scale artificial intelligence applications across various industries.
Why Do We Avoid AI?
- Offerings couldn’t generate interest over the last year as its billings have averaged 11.2% declines
- Gross margin of 43.5% reflects its high servicing costs
- Cash-burning history makes us doubt the long-term viability of its business model
At $8.76 per share, C3.ai trades at 5.9x forward price-to-sales. Read our free research report to see why you should think twice about including AI in your portfolio.
First Bancorp (FBNC)
Market Cap: $2.43 billion
Founded during the Great Depression in 1934 and originally known as Montgomery Bancorp, First Bancorp (NASDAQ: FBNC) is a community-oriented commercial bank providing a wide range of financial services to businesses and individuals in North and South Carolina.
Why Does FBNC Give Us Pause?
- Annual revenue growth of 2% over the last two years was below our standards for the banking sector
- Net interest margin of 3.1% is well below other banks, signaling its loans aren’t very profitable
- Performance over the past two years shows its incremental sales were less profitable as its earnings per share were flat
First Bancorp’s stock price of $58.70 implies a valuation ratio of 1.5x forward P/B. To fully understand why you should be careful with FBNC, 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 (+1,326% between June 2020 and June 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.
