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.

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.

Lamb Weston (LW)

Market Cap: $6.04 billion

Best known for its Grown in Idaho brand, Lamb Weston (NYSE: LW) produces and distributes potato products such as frozen french fries and mashed potatoes.

Why Do We Steer Clear of LW?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Sales are projected to tank by 1.2% over the next 12 months as demand evaporates
3. Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term

At $43.16 per share, Lamb Weston trades at 14.6x forward P/E. If you’re considering LW for your portfolio, see our FREE research report to learn more.

First American Financial (FAF)

Market Cap: $6.49 billion

Tracing its roots back to 1889 when California was experiencing its first major real estate boom, First American Financial (NYSE: FAF) provides title insurance, settlement services, and risk solutions for residential and commercial real estate transactions across the United States and internationally.

Why Does FAF Give Us Pause?

1. Annual revenue growth of 1% over the last five years was below our standards for the insurance sector
2. Net premiums earned plateaued over the last five years, signaling weak incremental demand for its insurance policies
3. Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 1.8% annually

First American Financial is trading at $63.42 per share, or 1x forward P/B. Dive into our free research report to see why there are better opportunities than FAF.

NOV (NOV)

Market Cap: $6.89 billion

With roots stretching back to 1862 when it began making equipment for early oil fields, NOV (NYSE: NOV) manufactures drilling rigs, drill bits, pumps, and other equipment used to drill oil and gas wells.

Why Should You Dump NOV?

1. Sales tumbled by 5.1% annually over the last ten years, showing market trends are working against its favor during this cycle
2. High extraction costs and unfavorable asset economics are reflected in its low gross margin of 20.2%
3. Poor free cash flow margin of 3.6% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

NOV’s stock price of $19.14 implies a valuation ratio of 19.4x forward P/E. Read our free research report to see why you should think twice about including NOV in your portfolio.

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-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.