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 pass on and some alternatives you should look into instead.
Insperity (NSP)
Market Cap: $1.99 billion
Pioneering the professional employer organization (PEO) industry it helped establish, Insperity (NYSE:NSP) provides human resources outsourcing services to small and medium-sized businesses, handling payroll, benefits, compliance, and HR administration.
Why Does NSP Fall Short?
- 2.5% annual revenue growth over the last two years was slower than its business services peers
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 3.6 percentage points
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 27.1% annually while its revenue grew
Insperity is trading at $52.14 per share, or 22.3x forward P/E. To fully understand why you should be careful with NSP, check out our full research report (it’s free).
MGIC Investment (MTG)
Market Cap: $6.30 billion
Founded in 1957 when the modern mortgage insurance industry was in its infancy, MGIC Investment (NYSE:MTG) provides private mortgage insurance that protects lenders when homebuyers default on their loans, enabling borrowers to purchase homes with smaller down payments.
Why Do We Steer Clear of MTG?
- 1.5% annual declines in net premiums earned for the past five years indicates policy sales struggled this cycle
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 8.4% annually
At $30.72 per share, MGIC Investment trades at 1.2x forward P/B. If you’re considering MTG for your portfolio, see our FREE research report to learn more.
Enterprise Financial Services (EFSC)
Market Cap: $2.32 billion
Starting as a single bank in Missouri in 1988 and expanding through strategic growth, Enterprise Financial Services (NASDAQ:EFSC) is a financial holding company that offers banking, lending, and wealth management services to businesses and individuals across seven states.
Why Are We Cautious About EFSC?
- Sales trends were unexciting over the last two years as its 8.4% annual growth was below the typical banking company
- Operational productivity has decreased over the last four years as its efficiency ratio worsened by 9.4 percentage points
- Performance over the past two years shows its incremental sales were less profitable, as its 3.6% annual earnings per share growth trailed its revenue gains
Enterprise Financial Services’s stock price of $63.98 implies a valuation ratio of 1.1x forward P/B. Dive into our free research report to see why there are better opportunities than EFSC.
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+1,154% between June 2020 and June 2025). Find your next big winner with StockStory today.