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. That said, here are three small-cap stocks to pass on and some alternatives you should look into instead.
Paylocity (PCTY)
Market Cap: $8.28 billion
Operating in a field where companies traditionally juggled multiple disconnected systems, Paylocity (NASDAQ:PCTY) provides cloud-based human capital management and payroll software solutions that help businesses manage their workforce and HR processes.
Why Do We Think Twice About PCTY?
- Customers were hesitant to make long-term commitments to its software as its 12.2% average ARR growth over the last year was sluggish
- Estimated sales growth of 6.9% for the next 12 months implies demand will slow from its two-year trend
- Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage
Paylocity’s stock price of $155.72 implies a valuation ratio of 4.4x forward price-to-sales. Check out our free in-depth research report to learn more about why PCTY doesn’t pass our bar.
Target Hospitality (TH)
Market Cap: $1.88 billion
Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ:TH) is a provider of specialty workforce lodging accommodations and services.
Why Do We Pass on TH?
- Number of utilized beds has disappointed over the past two years, indicating weak demand for its offerings
- Low free cash flow margin of 7.9% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $18.84 per share, Target Hospitality trades at 36.2x forward P/E. Read our free research report to see why you should think twice about including TH in your portfolio.
Transocean (RIG)
Market Cap: $6.25 billion
Operating one of the world's most capable fleets of ultra-deepwater drillships and harsh environment rigs, Transocean (NYSE:RIG) operates drilling rigs that energy companies rent to drill oil and gas wells in deep ocean waters.
Why Is RIG Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.3% annually over the last ten years
- Gross margin of 38.1% reflects its high production costs and unfavorable asset base
- Poor free cash flow margin of 5.2% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Transocean is trading at $5.60 per share, or 29.5x forward P/E. If you’re considering RIG for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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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-micro-cap company Kadant (+214% between June 2020 and June 2025). Find your next big winner with StockStory today.