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.
Lindsay (LNN)
Market Cap: $1.17 billion
A pioneer in the field of center pivot and lateral move irrigation, Lindsay (NYSE: LNN) provides a variety of proprietary water management and road infrastructure products and services.
Why Do We Steer Clear of LNN?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Diminishing returns on capital suggest its earlier profit pools are drying up
Lindsay’s stock price of $115.10 implies a valuation ratio of 19.9x forward P/E. To fully understand why you should be careful with LNN, check out our full research report (it’s free).
Columbia Financial (CLBK)
Market Cap: $2.96 billion
Founded during the Roaring Twenties in 1926 and headquartered in Fair Lawn, New Jersey, Columbia Financial (NASDAQ: CLBK) operates federally chartered savings banks in New Jersey that offer traditional banking services including loans, deposits, and insurance products.
Why Should You Sell CLBK?
- Net interest income stagnated over the last five years and signals the need for new growth strategies
- Inferior net interest margin of 2.1% means it must compensate for lower profitability through increased loan originations
- Sales over the last five years were less profitable as its earnings per share fell by 3.8% annually while its revenue was flat
Columbia Financial is trading at $10.93 per share, or 2x forward P/B. Read our free research report to see why you should think twice about including CLBK in your portfolio.
Atmus Filtration Technologies (ATMU)
Market Cap: $4.45 billion
Spun out of Cummins in 2023 after 65 years as part of the engine maker, Atmus Filtration Technologies (NYSE: ATMU) manufactures filters for trucks, construction equipment, and agriculture machinery to reduce emissions and protect engines.
Why Does ATMU Give Us Pause?
- Annual revenue growth of 5.6% over the last two years was below our standards for the industrials sector
- Gross margin of 26.3% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Free cash flow margin has stayed in place over the last five years
At $54.53 per share, Atmus Filtration Technologies trades at 18x forward P/E. Check out our free in-depth research report to learn more about why ATMU doesn’t pass our bar.
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