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.
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 swipe left on and some alternatives you should look into instead.
FormFactor (FORM)
Market Cap: $7.15 billion
With customers across the foundry and fabless markets, FormFactor (NASDAQ: FORM) is a US-based provider of test and measurement technologies for semiconductors.
Why Does FORM Give Us Pause?
- Muted 2.5% annual revenue growth over the last five years shows its demand lagged behind its semiconductor peers
- Earnings per share fell by 2.8% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Lacking free cash flow margin got worse over the last five years as its investment needs accelerated
At $90.93 per share, FormFactor trades at 49.1x forward P/E. If you’re considering FORM for your portfolio, see our FREE research report to learn more.
LKQ (LKQ)
Market Cap: $7.90 billion
A global distributor of vehicle parts and accessories, LKQ (NASDAQ: LKQ) offers its customers a comprehensive selection of high-quality, affordably priced automobile products.
Why Do We Think LKQ Will Underperform?
- 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
- Free cash flow margin is expected to remain in place over the coming year
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
LKQ is trading at $30.96 per share, or 10.1x forward P/E. Check out our free in-depth research report to learn more about why LKQ doesn’t pass our bar.
Sphere Entertainment (SPHR)
Market Cap: $4.04 billion
Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE: SPHR) hosts live entertainment events and distributes content across various media platforms.
Why Is SPHR Risky?
- 18.1% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Poor free cash flow margin of 7.5% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
Sphere Entertainment’s stock price of $115.27 implies a valuation ratio of 20.3x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SPHR in your portfolio.
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