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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Power Integrations (POWI)
Market Cap: $2.50 billion
A leading supplier of parts for electronics such as home appliances, Power Integrations (NASDAQ:POWI) is a semiconductor designer and developer specializing in products used for high-voltage power conversion.
Why Are We Out on POWI?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 15.7 percentage points
- Earnings per share fell by 2.1% annually over the last five years while its revenue was flat, showing each sale was less profitable
Power Integrations’s stock price of $43.76 implies a valuation ratio of 24.7x forward P/E. To fully understand why you should be careful with POWI, check out our full research report (it’s free).
Compass (COMP)
Market Cap: $4.67 billion
Fueled by its mission to replace the "paper-driven, antiquated workflow" of buying a house, Compass (NYSE:COMP) is a digital-first company operating a residential real estate brokerage in the United States.
Why Does COMP Worry Us?
- Demand for its offerings was relatively low as its number of principal agents has underwhelmed
- Poor expense management has led to operating margin losses
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Compass is trading at $8.97 per share, or 20.1x forward P/E. Check out our free in-depth research report to learn more about why COMP doesn’t pass our bar.
Resideo (REZI)
Market Cap: $5.00 billion
Resideo Technologies, Inc. (NYSE: REZI) is a manufacturer and distributor of technology-driven products and solutions for home comfort, energy management, water management, and safety and security.
Why Are We Cautious About REZI?
- Estimated sales growth of 2.4% for the next 12 months implies demand will slow from its two-year trend
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3.9% for the last five years
- Waning returns on capital imply its previous profit engines are losing steam
At $33.35 per share, Resideo trades at 12.2x forward EV-to-EBITDA. If you’re considering REZI for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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Don’t let fear keep you from great opportunities and take a look at Top 5 Strong Momentum Stocks for this week. 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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