3 Small-Cap Stocks We’re Skeptical Of

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.

The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.

AAON (AAON)

Market Cap: $7.66 billion

Backed by two million square feet of lab testing space, AAON (NASDAQ:AAON) makes heating, ventilation, and air conditioning equipment for different types of buildings.

Why Are We Wary of AAON?

1. Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 3.7 percentage points
2. Incremental sales over the last two years were much less profitable as its earnings per share fell by 21.5% annually while its revenue grew
3. 14.3 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

AAON’s stock price of $92.13 implies a valuation ratio of 46.7x forward P/E. Dive into our free research report to see why there are better opportunities than AAON.

HNI (HNI)

Market Cap: $2.54 billion

With roots dating back to 1944 and a significant acquisition of Kimball International in 2023, HNI (NYSE:HNI) manufactures and sells office furniture systems, seating, and storage solutions, as well as residential fireplaces and heating products.

Why Does HNI Give Us Pause?

1. 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

HNI is trading at $35.24 per share, or 8.5x forward P/E. Read our free research report to see why you should think twice about including HNI in your portfolio.

Stellar Bancorp (STEL)

Market Cap: $1.91 billion

Created through strategic mergers to serve the growing Texas business community, Stellar Bancorp (NYSE:STEL) is a Texas bank holding company that provides commercial banking services primarily to small and medium-sized businesses and professionals.

Why Do We Think STEL Will Underperform?

1. Sales tumbled by 4.2% annually over the last two years, showing market trends are working against its favor during this cycle
2. Concessions to defend its market share have ramped up over the last two years as its net interest margin decreased by 35.6 basis points (100 basis points = 1 percentage point)
3. Sales were less profitable over the last two years as its earnings per share fell by 15.1% annually, worse than its revenue declines

At $37.67 per share, Stellar Bancorp trades at 1.1x forward P/B. Check out our free in-depth research report to learn more about why STEL doesn’t pass our bar.

High-Quality Stocks for All Market Conditions

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.

But our AI platform says the party isn't over. Find out which 9 stocks made the cut this week — FREE. Get Our Top 9 Market-Beating Stocks for Free HERE.

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-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today.