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 swipe left on and some alternatives you should look into instead.
Sonos (SONO)
Market Cap: $1.54 billion
A pioneer in connected home audio systems, Sonos (NASDAQ: SONO) offers a range of premium wireless speakers and sound systems.
Why Do We Pass on SONO?
- Sales tumbled by 9.1% annually over the last two years, showing consumer trends are working against its favor
- Suboptimal cost structure is highlighted by its history of operating losses
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 5.8% annually
Sonos’s stock price of $12.98 implies a valuation ratio of 22x forward price-to-earnings. Read our free research report to see why you should think twice about including SONO in your portfolio.
Hexcel (HXL)
Market Cap: $4.71 billion
Founded shortly after World War II by a group of engineers from UC Berkley, Hexcel (NYSE: HXL) manufactures lightweight composite materials primarily for the aerospace and defense sectors.
Why Does HXL Worry Us?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.2% annually over the last five years
- Earnings per share have dipped by 10.5% annually over the past five years, which is concerning because stock prices follow EPS over the long term
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $58.59 per share, Hexcel trades at 24.5x forward price-to-earnings. If you’re considering HXL for your portfolio, see our FREE research report to learn more.
Hertz (HTZ)
Market Cap: $1.26 billion
Started with a dozen Model T Fords, Hertz (NASDAQ: HTZ) is a global car rental company providing vehicle rental services to leisure and business travelers.
Why Should You Dump HTZ?
- Weak unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
- Waning returns on capital imply its previous profit engines are losing steam
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Hertz is trading at $4.13 per share, or 3.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including HTZ in your portfolio.
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