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.
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.
Churchill Downs (CHDN)
Market Cap: $6.77 billion
Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ: CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.
Why Are We Hesitant About CHDN?
- Lackluster 13.6% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Estimated sales growth of 5.4% for the next 12 months implies demand will slow from its two-year trend
- ROIC of 8.9% reflects management’s challenges in identifying attractive investment opportunities
At $96.57 per share, Churchill Downs trades at 14.4x forward P/E. Dive into our free research report to see why there are better opportunities than CHDN.
Albany (AIN)
Market Cap: $1.77 billion
Founded in 1895, Albany (NYSE: AIN) is a global textiles and materials processing company, specializing in machine clothing for paper mills and engineered composite structures for aerospace and other industries.
Why Should You Sell AIN?
- Annual revenue growth of 3.7% over the last five years was below our standards for the industrials sector
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 7.7% annually while its revenue grew
- Free cash flow margin shrank by 8.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Albany is trading at $60.14 per share, or 13.7x forward EV-to-EBITDA. To fully understand why you should be careful with AIN, check out our full research report (it’s free).
Ellington Financial (EFC)
Market Cap: $1.36 billion
Operating under the guidance of Ellington Management Group, a respected name in structured credit markets, Ellington Financial (NYSE: EFC) acquires and manages a diverse portfolio of mortgage-related, consumer-related, and other financial assets to generate returns for investors.
Why Do We Think EFC Will Underperform?
- Muted 5% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
- Tangible book value per share tumbled by 2.9% annually over the last five years, showing banking sector trends are working against its favor during this cycle
Ellington Financial’s stock price of $13.61 implies a valuation ratio of 1x forward P/B. Read our free research report to see why you should think twice about including EFC in your portfolio.
Stocks We Like More
When Trump unveiled his aggressive tariff plan in April 2025, markets tanked as investors feared a full-blown trade war. But those who panicked and sold missed the subsequent rebound that’s already erased most losses.
Don’t let fear keep you from great opportunities and take a look at Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 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 for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
StockStory is growing and hiring equity analyst and marketing roles. Are you a 0 to 1 builder passionate about the markets and AI? See the open roles here.
