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.
The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Applied Industrial (AIT)
Market Cap: $9.91 billion
Formerly called The Ohio Ball Bearing Company, Applied Industrial (NYSE: AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.
Why Is AIT Not Exciting?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Anticipated sales growth of 6.1% for the next year implies demand will be shaky
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 7% annually
Applied Industrial’s stock price of $262.58 implies a valuation ratio of 24.6x forward P/E. Read our free research report to see why you should think twice about including AIT in your portfolio.
Enovis (ENOV)
Market Cap: $1.90 billion
With a focus on helping patients regain or maintain their natural motion, Enovis (NYSE: ENOV) develops and manufactures medical devices for orthopedic care, from injury prevention and pain management to joint replacement and rehabilitation.
Why Do We Avoid ENOV?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 7.1% annually over the last five years
- Negative returns on capital show management lost money while trying to expand the business, and its falling returns suggest its earlier profit pools are drying up
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $33.50 per share, Enovis trades at 10.7x forward P/E. If you’re considering ENOV for your portfolio, see our FREE research report to learn more.
Stewart Information Services (STC)
Market Cap: $2.03 billion
Founded in 1893 during America's westward expansion when property records were often disputed, Stewart Information Services (NYSE: STC) provides title insurance and real estate services, helping homebuyers, sellers, and lenders verify property ownership and protect against title defects.
Why Are We Hesitant About STC?
- Growth in insurance policies was lackluster over the last two years as its 1.3% annual growth underperformed the typical financial institution
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 1% annually while its revenue grew
- Muted 1.6% annual book value per share growth over the last two years shows its capital generation lagged behind its insurance peers
Stewart Information Services is trading at $72.54 per share, or 1.4x forward P/B. Check out our free in-depth research report to learn more about why STC doesn’t pass our bar.
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