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.
Kontoor Brands (KTB)
Market Cap: $3.79 billion
Founded in 2019 after separating from VF Corporation, Kontoor Brands (NYSE:KTB) is a clothing company known for its high-quality denim products.
Why Are We Out on KTB?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Poor free cash flow margin of 13% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Kontoor Brands’s stock price of $68.16 implies a valuation ratio of 11.5x forward P/E. Check out our free in-depth research report to learn more about why KTB doesn’t pass our bar.
Byrna (BYRN)
Market Cap: $432 million
Providing civilians with tools to disable, disarm, and deter would-be assailants, Byrna (NASDAQ:BYRN) is a provider of non-lethal weapons.
Why Does BYRN Worry Us?
- Historical operating margin losses point to an inefficient cost structure
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $19.04 per share, Byrna trades at 21.1x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than BYRN.
PAR Technology (PAR)
Market Cap: $1.52 billion
Originally founded in 1968 as a defense contractor for the U.S. government, PAR Technology (NYSE:PAR) provides cloud-based software, payment processing, and hardware solutions that help restaurants manage everything from point-of-sale to customer loyalty programs.
Why Do We Think Twice About PAR?
- Negative free cash flow raises questions about the return timeline for its investments
- Negative returns on capital show management lost money while trying to expand the business
- PAR Technology is trading at $37.17 per share, or 88.5x forward P/E.
Check out our free in-depth research report to learn more about why PAR doesn’t pass our bar.
Stocks We Like More
Your portfolio can’t afford to be based on yesterday’s story. The risk in a handful of heavily crowded stocks is rising daily.
The names generating the next wave of massive growth are right here in our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).
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 for free.
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