3 Small-Cap Stocks We Approach with Caution

Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.

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 swipe left on and some alternatives you should look into instead.

Clarus (CLAR)

Market Cap: $112.2 million

Initially a financial services business, Clarus (NASDAQ:CLAR) designs, manufactures, and distributes outdoor equipment and lifestyle products.

Why Do We Steer Clear of CLAR?

1. Sales were flat over the last five years, indicating it’s failed to expand its business
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Clarus’s stock price of $2.92 implies a valuation ratio of 0.4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than CLAR.

Custom Truck One Source (CTOS)

Market Cap: $2.21 billion

Inspired by a family gas station, Custom Truck One Source (NYSE:CTOS) is a distributor of trucks and heavy equipment.

Why Do We Think Twice About CTOS?

1. Sales trends were unexciting over the last two years as its 4.3% annual growth was below the typical industrials company
2. Earnings per share have dipped by 45.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
3. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value

Custom Truck One Source is trading at $10.25 per share, or 59x forward P/E. Read our free research report to see why you should think twice about including CTOS in your portfolio.

PennyMac Mortgage Investment Trust (PMT)

Market Cap: $908.6 million

Operating as a real estate investment trust since 2009 to maintain tax advantages, PennyMac Mortgage Investment Trust (NYSE:PMT) is a specialty finance company that invests in mortgage-related assets and operates a correspondent lending business.

Why Are We Out on PMT?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 23.1% annually over the last five years
2. Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
3. Tangible book value per share tumbled by 6.3% annually over the last five years, showing banking sector trends are working against its favor during this cycle

At $10.55 per share, PennyMac Mortgage Investment Trust trades at 0.7x forward P/B. Check out our free in-depth research report to learn more about why PMT doesn’t pass our bar.

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