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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Freshpet (FRPT)
Market Cap: $2.70 billion
Standing out from typical processed pet foods, Freshpet (NASDAQ: FRPT) is a pet food company whose product portfolio includes natural meals and treats for dogs and cats.
Why Are We Hesitant About FRPT?
- Smaller revenue base of $1.08 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Push for growth has led to negative returns on capital, signaling value destruction
At $55.07 per share, Freshpet trades at 41.5x forward P/E. Read our free research report to see why you should think twice about including FRPT in your portfolio.
Terex (TEX)
Market Cap: $3.02 billion
With humble beginnings as a dump truck company, Terex (NYSE: TEX) today manufactures lifting and material handling equipment designed to move and hoist heavy goods and materials.
Why Are We Cautious About TEX?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 19.3% annually while its revenue grew
- 3.7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Terex is trading at $46 per share, or 8.8x forward P/E. To fully understand why you should be careful with TEX, check out our full research report (it’s free for active Edge members).
Rogers (ROG)
Market Cap: $1.52 billion
With roots dating back to 1832, making it one of America's oldest continuously operating companies, Rogers (NYSE: ROG) designs and manufactures specialized engineered materials and components used in electric vehicles, telecommunications, renewable energy, and other high-performance applications.
Why Do We Think ROG Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 7% annually over the last two years
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 15.7% annually
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.4 percentage points
Rogers’s stock price of $84.28 implies a valuation ratio of 27.2x forward P/E. If you’re considering ROG for your portfolio, see our FREE research report to learn more.
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