Small-cap stocks can be incredibly lucrative investments because their lack of analyst coverage leads to frequent mispricings. However, these businesses (and their stock prices) often stay small because their subscale operations make it harder to expand their competitive moats.
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.
Travel + Leisure (TNL)
Market Cap: $3.87 billion
Formerly known as Wyndham Destinations, Travel + Leisure (NYSE: TNL) is a global vacation company that provides travelers with vacation ownership, exchange, and travel services.
Why Are We Cautious About TNL?
- Number of tours conducted has disappointed over the past two years, indicating weak demand for its offerings
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- 8× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Travel + Leisure is trading at $59.49 per share, or 8.9x forward P/E. Dive into our free research report to see why there are better opportunities than TNL.
Atkore (ATKR)
Market Cap: $2.11 billion
Protecting the things that power our world, Atkore (NYSE: ATKR) designs and manufactures electrical safety products.
Why Do We Avoid ATKR?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- 5.8 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
- Diminishing returns on capital suggest its earlier profit pools are drying up
Atkore’s stock price of $61.49 implies a valuation ratio of 10.2x forward P/E. Check out our free in-depth research report to learn more about why ATKR doesn’t pass our bar.
Scorpio Tankers (STNG)
Market Cap: $2.60 billion
Operating one of the youngest fleets in the industry, Scorpio Tankers (NYSE: STNG) is an international provider of marine transportation services, specializing in the shipment of refined petroleum.
Why Are We Hesitant About STNG?
- Sales tumbled by 1.5% annually over the last five years, showing market trends are working against its favor during this cycle
- Demand for its offerings was relatively low as its number of total vessels has underwhelmed
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
At $56.20 per share, Scorpio Tankers trades at 9.1x forward P/E. If you’re considering STNG for your portfolio, see our FREE research report to learn more.
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