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.
Envista (NVST)
Market Cap: $3.46 billion
Uniting more than 30 trusted brands including Nobel Biocare, Ormco, and DEXIS under one corporate umbrella, Envista Holdings (NYSE: NVST) is a global dental products company that provides equipment, consumables, and specialized technologies for dental professionals.
Why Do We Avoid NVST?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Negative returns on capital show management lost money while trying to expand the business, and its shrinking returns suggest its past profit sources are losing steam
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Envista’s stock price of $21 implies a valuation ratio of 18.6x forward P/E. If you’re considering NVST for your portfolio, see our FREE research report to learn more.
Jackson Financial (JXN)
Market Cap: $7.23 billion
Spun off from British insurer Prudential plc in 2021 after more than 60 years as its U.S. subsidiary, Jackson Financial (NYSE: JXN) offers annuity products and retirement solutions that help Americans grow and protect their retirement savings and income.
Why Are We Hesitant About JXN?
- Sluggish 2.8% annualized growth in net premiums earned over the last two years indicates the firm trailed its insurance peers
- Efficiency has decreased over the last four years as its pre-tax profit margin fell by 33.9 percentage points
- Earnings per share have contracted by 9.9% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Jackson Financial is trading at $104.46 per share, or 0.7x forward P/B. Read our free research report to see why you should think twice about including JXN in your portfolio.
Mercury General (MCY)
Market Cap: $4.81 billion
Founded in 1961 and maintaining a network of over 6,300 independent agents across the country, Mercury General (NYSE: MCY) is an insurance company that primarily sells automobile insurance policies through independent agents in 11 states, with a strong focus on California.
Why Do We Think MCY Will Underperform?
- Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
- Muted 1.6% annual book value per share growth over the last five years shows its capital generation lagged behind its insurance peers
- Below-average return on equity indicates management struggled to find compelling investment opportunities
At $86.93 per share, Mercury General trades at 2.3x forward P/B. Check out our free in-depth research report to learn more about why MCY doesn’t pass our bar.
Stocks We Like More
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