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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.

Genesco (GCO)

Market Cap: $297.7 million

Spanning a broad range of styles, brands, and prices, Genesco (NYSE: GCO) sells footwear, apparel, and accessories through multiple brands and banners.

Why Do We Think GCO Will Underperform?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
2. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
3. High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate

Genesco’s stock price of $27.54 implies a valuation ratio of 12.6x forward P/E. Check out our free in-depth research report to learn more about why GCO doesn’t pass our bar.

Kadant (KAI)

Market Cap: $3.72 billion

Headquartered in Massachusetts, Kadant (NYSE: KAI) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide.

Why Do We Think Twice About KAI?

1. Annual revenue growth of 4.8% over the last two years was below our standards for the industrials sector
2. Incremental sales over the last two years were much less profitable as its earnings per share fell by 3.9% annually while its revenue grew
3. Eroding returns on capital suggest its historical profit centers are aging

Kadant is trading at $313.85 per share, or 28x forward P/E. If you’re considering KAI for your portfolio, see our FREE research report to learn more.

Gates Industrial Corporation (GTES)

Market Cap: $6.00 billion

Helping create one of the most memorable moments for the iconic “Jurassic Park” film, Gates (NYSE: GTES) offers power transmission and fluid transfer equipment for various industries.

Why Is GTES Not Exciting?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Projected sales growth of 3.8% for the next 12 months suggests sluggish demand
3. ROIC of 7.1% reflects management’s challenges in identifying attractive investment opportunities

At $23.72 per share, Gates Industrial Corporation trades at 14.3x forward P/E. Check out our free in-depth research report to learn more about why GTES doesn’t pass our bar.

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 Exlservice (+354% five-year return). Find your next big winner with StockStory today.