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 pass on and some alternatives you should look into instead.
Opendoor (OPEN)
Market Cap: $3.37 billion
Founded by real estate guru Eric Wu, Opendoor (NASDAQ:OPEN) offers a technology-driven, convenient, and streamlined process to buy and sell homes.
Why Do We Think OPEN Will Underperform?
- Demand for its offerings was relatively low as its number of homes sold has underwhelmed
- Poor free cash flow margin of 0.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $3.47 per share, Opendoor trades at 117.1x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than OPEN.
Rush Enterprises (RUSHA)
Market Cap: $6.01 billion
Headquartered in Texas, Rush Enterprises (NASDAQ:RUSH.A) provides truck-related services and solutions, including sales, leasing, parts, and maintenance for commercial vehicles.
Why Is RUSHA Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.3% annually over the last two years
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Diminishing returns on capital suggest its earlier profit pools are drying up
Rush Enterprises’s stock price of $77.11 implies a valuation ratio of 19.4x forward P/E. To fully understand why you should be careful with RUSHA, check out our full research report (it’s free).
Trustmark (TRMK)
Market Cap: $2.70 billion
Tracing its roots back to 1889 in Mississippi, Trustmark (NASDAQ:TRMK) is a financial services organization providing banking, wealth management, insurance, and mortgage services across five southeastern states.
Why Does TRMK Fall Short?
- Muted 8.6% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Estimated net interest income growth of 4.1% for the next 12 months implies demand will slow from its five-year trend
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 3.9% annually
Trustmark is trading at $46.58 per share, or 1.2x forward P/B. Dive into our free research report to see why there are better opportunities than TRMK.
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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-micro-cap company Kadant (+214% between June 2020 and June 2025). Find your next big winner with StockStory today.