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.
Sotera Health Company (SHC)
Market Cap: $4.71 billion
With a critical role in ensuring the safety of millions of patients worldwide, Sotera Health (NASDAQGS:SHC) provides sterilization services, lab testing, and advisory services to ensure medical devices, pharmaceuticals, and food products are safe for use.
Why Does SHC Fall Short?
- Sales trends were unexciting over the last five years as its 7.3% annual growth was below the typical healthcare company
- Modest revenue base of $1.12 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Low free cash flow margin of 1.1% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $16.58 per share, Sotera Health Company trades at 20x forward P/E. If you’re considering SHC for your portfolio, see our FREE research report to learn more.
Luxfer (LXFR)
Market Cap: $344.7 million
With its magnesium alloys used in the construction of the famous Spirit of St. Louis aircraft, Luxfer (NYSE:LXFR) offers specialized materials, components, and gas containment devices to various industries.
Why Are We Out on LXFR?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.5% annually over the last two years
- Sales are projected to be flat over the next 12 months and imply weak demand
- Eroding returns on capital suggest its historical profit centers are aging
Luxfer’s stock price of $12.90 implies a valuation ratio of 11.3x forward P/E. To fully understand why you should be careful with LXFR, check out our full research report (it’s free for active Edge members).
LifeStance Health Group (LFST)
Market Cap: $1.94 billion
With over 6,600 licensed mental health professionals treating more than 880,000 patients annually, LifeStance Health (NASDAQ:LFST) provides outpatient mental health services through a network of clinicians offering psychiatric evaluations, psychological testing, and therapy across 33 states.
Why Are We Cautious About LFST?
- Revenue base of $1.32 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Negative returns on capital show management lost money while trying to expand the business
LifeStance Health Group is trading at $4.98 per share, or 27.6x forward P/E. Read our free research report to see why you should think twice about including LFST in your portfolio.
Stocks We Like More
When Trump unveiled his aggressive tariff plan in April 2025, markets tanked as investors feared a full-blown trade war. But those who panicked and sold missed the subsequent rebound that’s already erased most losses.
Don’t let fear keep you from great opportunities and take a look at Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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