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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Zumiez (ZUMZ)
Market Cap: $228.2 million
With store associates called “Zumiez Stash Members”, Zumiez (NASDAQ: ZUMZ) is a specialty retailer of street and skate apparel, footwear, and accessories.
Why Should You Dump ZUMZ?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Subscale operations are evident in its revenue base of $889.2 million, meaning it has fewer distribution channels than its larger rivals
- Poor expense management has led to operating losses
Zumiez’s stock price of $11.83 implies a valuation ratio of 29.8x forward P/E. Dive into our free research report to see why there are better opportunities than ZUMZ.
American Airlines (AAL)
Market Cap: $6.88 billion
One of the ‘Big Four’ airlines in the US, American Airlines (NASDAQ: AAL) is a major global air carrier that serves both business and leisure travelers through its domestic and international flights.
Why Do We Pass on AAL?
- Demand for its offerings was relatively low as its number of revenue passenger miles has underwhelmed
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
American Airlines is trading at $10.54 per share, or 7.1x forward P/E. To fully understand why you should be careful with AAL, check out our full research report (it’s free).
Avantor (AVTR)
Market Cap: $8.16 billion
With roots dating back to 1904 and embedded in virtually every stage of scientific research and production, Avantor (NYSE: AVTR) provides mission-critical products, materials, and services to customers in biopharma, healthcare, education, and advanced technology industries.
Why Are We Cautious About AVTR?
- 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
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Adjusted operating margin declined by 3 percentage points over the last two years as its sales cratered
At $12.16 per share, Avantor trades at 10.9x forward P/E. Check out our free in-depth research report to learn more about why AVTR doesn’t pass our bar.
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