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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Paylocity (PCTY)
Market Cap: $9.89 billion
Operating in a field where companies traditionally juggled multiple disconnected systems, Paylocity (NASDAQ: PCTY) provides cloud-based human capital management and payroll software solutions that help businesses manage their workforce and HR processes.
Why Does PCTY Fall Short?
- Estimated sales growth of 7.6% for the next 12 months implies demand will slow from its three-year trend
- Gross margin of 68.9% reflects its relatively high servicing costs
Paylocity is trading at $179.69 per share, or 5.9x forward price-to-sales. To fully understand why you should be careful with PCTY, check out our full research report (it’s free).
Crocs (CROX)
Market Cap: $4.76 billion
Founded in 2002, Crocs (NASDAQ: CROX) sells casual footwear and is known for its iconic clog shoe.
Why Does CROX Worry Us?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Sales are projected to tank by 4.1% over the next 12 months as demand evaporates
- Diminishing returns on capital suggest its earlier profit pools are drying up
Crocs’s stock price of $87.25 implies a valuation ratio of 6.8x forward P/E. Read our free research report to see why you should think twice about including CROX in your portfolio.
PennyMac Mortgage Investment Trust (PMT)
Market Cap: $1.07 billion
Operating as a real estate investment trust since 2009 to maintain tax advantages, PennyMac Mortgage Investment Trust (NYSE: PMT) is a specialty finance company that invests in mortgage-related assets and operates a correspondent lending business.
Why Are We Hesitant About PMT?
- Annual net interest income growth of 3.5% over the last five years was below our standards for the banking sector
- Estimated net interest income decline of 145% for the next 12 months implies a challenging demand environment
- Tangible book value per share tumbled by 4.8% annually over the last five years, showing banking sector trends are working against its favor during this cycle
At $12.31 per share, PennyMac Mortgage Investment Trust trades at 0.8x forward P/B. Check out our free in-depth research report to learn more about why PMT doesn’t pass our bar.
High-Quality Stocks for All Market Conditions
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