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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Asana (ASAN)
Market Cap: $1.72 billion
Born from the founders' frustration with the inefficiencies of email-based collaboration at Facebook, Asana (NYSE: ASAN) provides a work management platform that helps organizations track projects, set goals, and manage workflows in a centralized digital workspace.
Why Are We Out on ASAN?
- Average ARR growth of 9.6% over the last year has disappointed, suggesting it’s had a hard time winning long-term deals and renewals
- Customers have churned over the last year due to the commoditized nature of its software, as reflected in its 96% net revenue retention rate
- Drawn-out sales process reflects its software’s integration hurdles with enterprise clients, restraining customer growth potential
Asana is trading at $7 per share, or 1.9x forward price-to-sales. Dive into our free research report to see why there are better opportunities than ASAN.
Bausch + Lomb (BLCO)
Market Cap: $5.45 billion
With a nearly 170-year history dedicated to vision care and eye health innovation, Bausch + Lomb (NYSE: BLCO) develops and manufactures a comprehensive range of eye health products including contact lenses, pharmaceuticals, surgical devices, and consumer eye care solutions.
Why Does BLCO Give Us Pause?
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 13.2 percentage points
- ROIC of 1.4% reflects management’s challenges in identifying attractive investment opportunities
Bausch + Lomb’s stock price of $16.18 implies a valuation ratio of 18.4x forward P/E. Read our free research report to see why you should think twice about including BLCO in your portfolio.
Transocean (RIG)
Market Cap: $6.73 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 Do We Think RIG Will Underperform?
- Annual sales declines of 4.7% for the past ten years show its products and services struggled to connect with the market during this cycle
- Gross margin of 37.9% reflects its high production costs and unfavorable asset base
- Low free cash flow margin of 4.6% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $5.05 per share, Transocean trades at 26.7x forward P/E. Dive into our free research report to see why there are better opportunities than RIG.
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