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.
Barrett (BBSI)
Market Cap: $819.1 million
Operating as a professional employer organization (PEO) that serves over 8,000 companies with more than 120,000 worksite employees, Barrett Business Services (NASDAQ:BBSI) provides management solutions that help small and mid-sized businesses handle human resources, payroll, workers' compensation, and other administrative functions.
Why Are We Cautious About BBSI?
- Flat earnings per share over the last two years lagged its peers
- Poor free cash flow margin of 0% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Eroding returns on capital suggest its historical profit centers are aging
At $33.92 per share, Barrett trades at 0.6x forward price-to-sales. If you’re considering BBSI for your portfolio, see our FREE research report to learn more.
Texas Capital Bank (TCBI)
Market Cap: $4.29 billion
Founded during the Texas banking renaissance of the 1990s with an entrepreneurial spirit, Texas Capital Bancshares (NASDAQ:TCBI) is a financial services firm that provides banking, wealth management, and investment banking services to businesses and individuals across Texas and beyond.
Why Are We Hesitant About TCBI?
- Annual net interest income growth of 5.7% over the last five years was below our standards for the banking sector
- Estimated net interest income growth of 2.1% for the next 12 months implies demand will slow from its five-year trend
- Low return on equity reflects management’s struggle to allocate funds effectively
Texas Capital Bank is trading at $99.92 per share, or 1.2x forward P/B. Check out our free in-depth research report to learn more about why TCBI doesn’t pass our bar.
Select Water Solutions (WTTR)
Market Cap: $2.45 billion
Managing over 24 billion barrels of produced water annually across major U.S. shale plays, Select Water Solutions (NYSE:WTTR) provides water sourcing, recycling, disposal, and treatment services for oil and gas producers.
Why Do We Think Twice About WTTR?
- Subscale operations are evident in its revenue base of $1.43 billion, meaning it has fewer distribution channels than its larger rivals
- Costly operations and weak unit economics result in an inferior gross margin of 24.2% that must be offset through higher production volumes
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.6% for the last five years
Select Water Solutions’s stock price of $19.05 implies a valuation ratio of 31.8x forward P/E. To fully understand why you should be careful with WTTR, check out our full research report (it’s free).
Stocks We Like More
WHILE YOU’RE HERE: Top 9 Market-Beating Stocks. The best stocks don’t just beat the market once. They do it again. And again. Robust revenue growth, rising free cash flow, returns on capital that leave their competition in the dust. The market has already rewarded these businesses.
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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 Tecnoglass (+1,552% between June 2020 and June 2025). Find your next big winner with StockStory today.