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.
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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
The Real Brokerage (REAX)
Market Cap: $1.06 billion
Founded in Toronto, Canada in 2014, The Real Brokerage (NASDAQ:REAX) is a technology-driven real estate brokerage firm combining a tech-centric model with an agent-centric philosophy.
Why Are We Hesitant About REAX?
- Historical operating margin losses point to an inefficient cost structure
- Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3.4% for the last two years
The Real Brokerage’s stock price of $5.05 implies a valuation ratio of 18.9x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than REAX.
MGIC Investment (MTG)
Market Cap: $6.43 billion
Founded in 1957 when the modern mortgage insurance industry was in its infancy, MGIC Investment (NYSE:MTG) provides private mortgage insurance that protects lenders when homebuyers default on their loans, enabling borrowers to purchase homes with smaller down payments.
Why Are We Wary of MTG?
- 1.3% annual declines in net premiums earned for the past five years indicates policy sales struggled this cycle
- Expenses have increased as a percentage of revenue over the last two years as its combined ratio degraded by 10.7 percentage points
- Earnings per share lagged its peers over the last two years as they only grew by 6.1% annually
MGIC Investment is trading at $27.88 per share, or 1.2x forward P/B. If you’re considering MTG for your portfolio, see our FREE research report to learn more.
Enterprise Financial Services (EFSC)
Market Cap: $2.20 billion
Starting as a single bank in Missouri in 1988 and expanding through strategic growth, Enterprise Financial Services (NASDAQ:EFSC) is a financial holding company that offers banking, lending, and wealth management services to businesses and individuals across seven states.
Why Does EFSC Give Us Pause?
- Estimated net interest income growth of 4.2% for the next 12 months implies demand will slow from its five-year trend
- Net interest margin dropped by 25.7 basis points (100 basis points = 1 percentage point) over the last two years, implying the firm’s loan book profitability fell as competitors entered the market
- Overall productivity is expected to decrease over the next year as Wall Street thinks its efficiency ratio will degrade by 1.1 percentage points
At $59.41 per share, Enterprise Financial Services trades at 1.2x forward P/B. Read our free research report to see why you should think twice about including EFSC in your portfolio.
High-Quality Stocks for All Market Conditions
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 9 Market-Beating Stocks. 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 Exlservice (+354% 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
StockStory is growing and hiring equity analyst and marketing roles. Are you a 0 to 1 builder passionate about the markets and AI? See the open roles here.