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.
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.
H&R Block (HRB)
Market Cap: $5.19 billion
Founded in 1955 by brothers Henry W. Bloch and Richard A. Bloch, H&R Block (NYSE:HRB) is a tax preparation company offering professional tax assistance and financial solutions to individuals and small businesses.
Why Do We Think HRB Will Underperform?
- Products and services aren’t resonating with the market as its revenue declined by 2.1% annually over the last five years
- Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 8.8% annually
- Diminishing returns on capital suggest its earlier profit pools are drying up
H&R Block’s stock price of $40.95 implies a valuation ratio of 6.6x forward P/E. To fully understand why you should be careful with HRB, check out our full research report (it’s free).
NeoGenomics (NEO)
Market Cap: $1.85 billion
Operating a network of CAP-accredited and CLIA-certified laboratories across the United States and United Kingdom, NeoGenomics (NASDAQ:NEO) provides specialized cancer diagnostic testing services, including genetic analysis, molecular testing, and pathology consultation for oncologists and healthcare providers.
Why Is NEO Not Exciting?
- Subscale operations are evident in its revenue base of $746 million, meaning it has fewer distribution channels than its larger rivals
- Push for growth has led to negative returns on capital, signaling value destruction
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $14.24 per share, NeoGenomics trades at 58.8x forward P/E. Dive into our free research report to see why there are better opportunities than NEO.
Stewart Information Services (STC)
Market Cap: $2.10 billion
Founded in 1893 during America's westward expansion when property records were often disputed, Stewart Information Services (NYSE:STC) provides title insurance and real estate services, helping homebuyers, sellers, and lenders verify property ownership and protect against title defects.
Why Does STC Fall Short?
- Net premiums earned expanded by 1.2% annually over the last five years, falling below our expectations for the insurance sector
- Earnings per share fell by 6.5% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Capital trends were unexciting over the last two years as its 4.6% annual book value per share growth was below the typical insurance firm
Stewart Information Services is trading at $68.93 per share, or 1.2x forward P/B. Check out our free in-depth research report to learn more about why STC doesn’t pass our bar.
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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-small-cap company Exlservice (+271% between June 2020 and June 2025). Find your next big winner with StockStory today.