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.
AAON (AAON)
Market Cap: $5.86 billion
Backed by two million square feet of lab testing space, AAON (NASDAQ: AAON) makes heating, ventilation, and air conditioning equipment for different types of buildings.
Why Does AAON Fall Short?
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 5.2 percentage points
- Earnings per share fell by 8.3% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Free cash flow margin dropped by 26.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $75.66 per share, AAON trades at 30x forward P/E. Check out our free in-depth research report to learn more about why AAON doesn’t pass our bar.
Blink Charging (BLNK)
Market Cap: $91.48 million
One of the first EV charging companies to go public, Blink Charging (NASDAQ: BLNK) is a manufacturer, owner, operator, and provider of electric vehicle charging equipment and networked EV charging services.
Why Does BLNK Give Us Pause?
- Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 8.7% annually
- Cash-burning history makes us doubt the long-term viability of its business model
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Blink Charging is trading at $0.90 per share, or 0.9x forward price-to-sales. To fully understand why you should be careful with BLNK, check out our full research report (it’s free).
Texas Capital Bank (TCBI)
Market Cap: $3.64 billion
Founded during the Texas banking renaissance of the 1990s with an entrepreneurial spirit, Texas Capital Bancshares (NASDAQ: TCBI) is a financial services firm that provides banking, wealth management, and investment banking services to businesses and individuals across Texas and beyond.
Why Are We Cautious About TCBI?
- 2.2% annual net interest income growth over the last five years was slower than its banking peers
- Weak unit economics are reflected in its net interest margin of 3.1%, one of the worst among bank companies
- Earnings per share fell by 11.1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
Texas Capital Bank’s stock price of $80.29 implies a valuation ratio of 1.1x forward P/B. Dive into our free research report to see why there are better opportunities than TCBI.
High-Quality Stocks for All Market Conditions
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