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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
C3.ai (AI)
Market Cap: $1.61 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 Should You Sell AI?
- Billings have dropped by 33.8% over the last year, suggesting it might have to lower prices to stimulate growth
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Negative free cash flow raises questions about the return timeline for its investments
C3.ai is trading at $10.36 per share, or 6.4x forward price-to-sales. Read our free research report to see why you should think twice about including AI in your portfolio.
Photronics (PLAB)
Market Cap: $1.81 billion
Sporting a global footprint of facilities, Photronics (NASDAQ: PLAB) is a manufacturer of photomasks, templates used to transfer patterns onto semiconductor wafers.
Why Are We Hesitant About PLAB?
- Sales tumbled by 1.4% annually over the last two years, showing market trends are working against it during this cycle
- Projected sales growth of 1.8% for the next 12 months suggests sluggish demand
- Gross margin of 35% is below its competitors, leaving less money to invest in areas like marketing and R&D
At $31.00 per share, Photronics trades at 17.4x forward P/E. Check out our free in-depth research report to learn more about why PLAB doesn’t pass our bar.
Medifast (MED)
Market Cap: $119.7 million
Known for its Optavia program that combines portion-controlled meal replacements with coaching, Medifast (NYSE: MED) has a broad product portfolio of bars, snacks, drinks, and desserts for those looking to lose weight or consume healthier foods.
Why Is MED Risky?
- Products aren’t resonating with the market as its revenue declined by 38.7% annually over the last three years
- Operating margin declined by 9.5 percentage points over the last year as its sales cratered
- Earnings per share have contracted by 29.9% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Medifast’s stock price of $11.48 implies a valuation ratio of 0.5x forward price-to-sales. To fully understand why you should be careful with MED, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI is taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
Our AI system flagged Palantir before it ran 1,662% between October 2022 and February 2026. AppLovin before it ran 753% between February 2024 and February 2026. Nvidia before it ran 1,178% between January 2023 and February 2026. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.
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 Tecnoglass (+1,552% between June 2020 and June 2025). Find your next big winner with StockStory today.
