Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.
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.
MSC Industrial (MSM)
Market Cap: $4.67 billion
Founded in NYC’s Little Italy, MSC Industrial Direct (NYSE: MSM) provides industrial supplies and equipment, offering vast and reliable selection for customers such as contractors
Why Do We Avoid MSM?
- 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
- Earnings per share fell by 3.3% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Diminishing returns on capital suggest its earlier profit pools are drying up
MSC Industrial’s stock price of $83.59 implies a valuation ratio of 19.2x forward P/E. To fully understand why you should be careful with MSM, check out our full research report (it’s free).
ChargePoint (CHPT)
Market Cap: $166.5 million
The most prominent EV charging company during the COVID bull market, ChargePoint (NYSE: CHPT) is a provider of electric vehicle charging technology solutions in North America and Europe.
Why Do We Think Twice About CHPT?
- Sales tumbled by 13.8% annually over the last two years, showing market trends are working against its favor during this cycle
- Cash burn makes us question whether it can achieve sustainable long-term growth
- EBITDA losses may force it to accept punitive lending terms or high-cost debt
At $7.07 per share, ChargePoint trades at 0.4x forward price-to-sales. Read our free research report to see why you should think twice about including CHPT in your portfolio.
Jazz Pharmaceuticals (JAZZ)
Market Cap: $9.95 billion
Originally founded in 2003 and now headquartered in Ireland following a 2012 tax inversion merger, Jazz Pharmaceuticals (NASDAQGS:JAZZ) develops and markets medicines for sleep disorders, epilepsy, and cancer, with a focus on treatments for patients with limited therapeutic options.
Why Does JAZZ Give Us Pause?
- 4.7% annual revenue growth over the last two years was slower than its healthcare peers
- 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
- High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Jazz Pharmaceuticals is trading at $163.70 per share, or 7.4x forward P/E. Check out our free in-depth research report to learn more about why JAZZ doesn’t pass our bar.
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