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Investors looking for hidden gems should keep an eye on small-cap stocks because they’re frequently overlooked by Wall Street. Many opportunities exist in this part of the market, but it is also a high-risk, high-reward environment due to the lack of reliable analyst price targets.

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.

TreeHouse Foods (THS)

Market Cap: $1.14 billion

Whether it be packaged crackers, broths, or beverages, Treehouse Foods (NYSE:THS) produces a wide range of private-label foods for grocery and food service customers.

Why Should You Dump THS?

1. Falling unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy

2. Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 16.5% that must be offset through higher volumes

3. Low returns on capital reflect management’s struggle to allocate funds effectively

At $22.60 per share, TreeHouse Foods trades at 11.7x forward P/E. Check out our free in-depth research report to learn more about why THS doesn’t pass our bar.

Richardson Electronics (RELL)

Market Cap: $128.1 million

Founded in 1947, Richardson Electronics (NASDAQ:RELL) is a distributor of power grid and microwave tubes as well as consumables related to those products.

Why Is RELL Risky?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 12.3% annually over the last two years

2. Earnings per share have contracted by 74.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance

3. Low free cash flow margin of -0.4% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

Richardson Electronics’s stock price of $8.89 implies a valuation ratio of 12.8x forward P/E. Read our free research report to see why you should think twice about including RELL in your portfolio, it’s free.

BWX (BWXT)

Market Cap: $9.90 billion

Contributing components and materials to the famous Manhattan Project in the 1940s, BWX (NYSE:BWXT) is a manufacturer and service provider of nuclear components and fuel for government and commercial industries.

Why Are We Hesitant About BWXT?

1. Muted 6.6% annual revenue growth over the last five years shows its demand lagged behind its industrials peers

2. Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 2.4 percentage points

3. Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 3.8% annually