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.

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

Knowles (KN)

Market Cap: $1.41 billion

With roots dating back to 1946 and a focus on components that must perform flawlessly in critical situations, Knowles (NYSE:KN) designs and manufactures specialized electronic components like high-performance capacitors, microphones, and speakers for medical technology, defense, and industrial applications.

Why Do We Pass on KN?

1. Annual sales declines of 6.2% for the past four years show its products and services struggled to connect with the market during this cycle

2. Forecasted revenue decline of 7.2% for the upcoming 12 months implies demand will fall even further

3. Flat earnings per share over the last five years lagged its peers

Knowles is trading at $16.24 per share, or 14.7x forward P/E. Read our free research report to see why you should think twice about including KN in your portfolio, it’s free.

Kennametal (KMT)

Market Cap: $1.62 billion

Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE:KMT) is a provider of industrial materials and tools for various sectors.

Why Should You Dump KMT?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy

2. Estimated sales for the next 12 months are flat and imply a softer demand environment

3. Earnings per share have dipped by 1.8% annually over the past five years, which is concerning because stock prices follow EPS over the long term

Kennametal’s stock price of $21.29 implies a valuation ratio of 17.7x forward P/E. To fully understand why you should be careful with KMT, check out our full research report (it’s free).

Organon (OGN)

Market Cap: $2.40 billion

Spun off from Merck in 2021 to create a company dedicated to addressing unmet needs in women's health, Organon (NYSE:OGN) is a global healthcare company focused on improving women's health through prescription therapies, medical devices, biosimilars, and established medicines.

Why Is OGN Risky?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 3.8% annually over the last five years

2. Earnings per share have contracted by 18% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance

3. Free cash flow margin dropped by 28.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up