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 avoid and some other investments you should consider instead.

Reynolds (REYN)

Market Cap: $4.74 billion

Best known for its aluminum foil, Reynolds (NASDAQ:REYN) is a household products company whose products focus on food storage, cooking, and waste.

Why Do We Avoid REYN?

1. Declining unit sales over the past two years imply it may need to invest in product improvements to get back on track

2. Forecasted revenue decline of 1.4% for the upcoming 12 months implies demand will fall off a cliff

3. Free cash flow margin shrank by 6.1 percentage points over the last year, suggesting the company is consuming more capital to stay competitive

Reynolds’s stock price of $22.75 implies a valuation ratio of 13.7x forward P/E. Check out our free in-depth research report to learn more about why REYN doesn’t pass our bar.

ESAB (ESAB)

Market Cap: $7.61 billion

Having played a significant role in the construction of the iconic Sydney Opera House, ESAB (NYSE:ESAB) manufactures and sells welding and cutting equipment for numerous industries.

Why Are We Cautious About ESAB?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth

2. Estimated sales growth of 2.9% for the next 12 months is soft and implies weaker demand

3. Earnings per share lagged its peers over the last three years as they only grew by 4.4% annually

ESAB is trading at $125.56 per share, or 23.3x forward P/E. If you’re considering ESAB for your portfolio, see our FREE research report to learn more.

Myriad Genetics (MYGN)

Market Cap: $375.2 million

Founded in 1991 as one of the pioneers in translating genetic discoveries into clinical applications, Myriad Genetics (NASDAQ:MYGN) develops genetic tests that assess disease risk, guide treatment decisions, and provide insights across oncology, women's health, and mental health.

Why Should You Dump MYGN?

1. Annual revenue growth of 1.8% over the last five years was below our standards for the healthcare sector

2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 29.7% annually

3. Push for growth has led to negative returns on capital, signaling value destruction, and its falling returns suggest its earlier profit pools are drying up