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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Fiverr (FVRR)
Market Cap: $509.7 million
Based in Tel Aviv, Fiverr (NYSE: FVRR) operates a fixed price global freelance marketplace for digital services.
Why Does FVRR Give Us Pause?
- Active Buyers have declined by 9.9% annually over the last two years, suggesting it may need to revamp its features or user experience to stay competitive
- Estimated sales growth of 5.4% for the next 12 months implies demand will slow from its three-year trend
- Excessive marketing spend signals little organic demand and traction for its platform
Fiverr’s stock price of $13.67 implies a valuation ratio of 0.9x forward EV/EBITDA. Check out our free in-depth research report to learn more about why FVRR doesn’t pass our bar.
La-Z-Boy (LZB)
Market Cap: $1.55 billion
The prized possession of every mancave, La-Z-Boy (NYSE: LZB) is a furniture company specializing in recliners, sofas, and seats.
Why Are We Out on LZB?
- Sales trends were unexciting over the last five years as its 5.8% annual growth was below the typical consumer discretionary company
- Free cash flow margin is projected to show no improvement next year
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $37.48 per share, La-Z-Boy trades at 13.2x forward P/E. If you’re considering LZB for your portfolio, see our FREE research report to learn more.
Lucky Strike (LUCK)
Market Cap: $1.04 billion
Born from the transformation of traditional bowling alleys into modern entertainment destinations, Lucky Strike (NYSE: LUCK) operates bowling alleys and other entertainment venues with upscale amenities, arcade games, and food and beverage services across North America.
Why Do We Pass on LUCK?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Lucky Strike is trading at $7.56 per share, or 34.9x forward P/E. Dive into our free research report to see why there are better opportunities than LUCK.
High-Quality Stocks for All Market Conditions
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