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.
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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Simpson (SSD)
Market Cap: $8.20 billion
Aiming to build safer and stronger buildings, Simpson (NYSE: SSD) designs and manufactures structural connectors, anchors, and other construction products.
Why Do We Think Twice About SSD?
- Muted 2.6% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Free cash flow margin dropped by 10.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Simpson’s stock price of $197.08 implies a valuation ratio of 23.3x forward P/E. Read our free research report to see why you should think twice about including SSD in your portfolio.
Fulton Financial (FULT)
Market Cap: $3.58 billion
Tracing its roots back to 1882 in the heart of Pennsylvania, Fulton Financial (NASDAQ: FULT) is a financial holding company that provides banking, lending, and wealth management services to consumers and businesses across five Mid-Atlantic states.
Why Is FULT Not Exciting?
- Estimated net interest income growth of 1.9% for the next 12 months implies demand will slow from its five-year trend
- Projected 2.8 percentage point efficiency ratio increase over the next year signals its day-to-day expenses will rise
- 4.3% annual tangible book value per share growth over the last five years was slower than its banking peers
At $19.64 per share, Fulton Financial trades at 1.1x forward P/B. If you’re considering FULT for your portfolio, see our FREE research report to learn more.
Arbor Realty Trust (ABR)
Market Cap: $2.27 billion
With roots dating back to 2003 and a focus on the stability of multifamily housing, Arbor Realty Trust (NYSE: ABR) is a specialized lender that provides financing solutions for multifamily and commercial real estate while also originating and servicing government-backed mortgage loans.
Why Do We Steer Clear of ABR?
- Sales tumbled by 8.7% annually over the last two years, showing market trends are working against its favor during this cycle
- Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
- Tangible book value per share tumbled by 3.3% annually over the last two years, showing banking sector trends are working against its favor during this cycle
Arbor Realty Trust is trading at $11.87 per share, or 1x forward P/B. Check out our free in-depth research report to learn more about why ABR doesn’t pass our bar.
High-Quality Stocks for All Market Conditions
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