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.
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. Keeping that in mind, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.
Energy Recovery (ERII)
Market Cap: $569.5 million
Having saved far more than a trillion gallons of water, Energy Recovery (NASDAQ: ERII) provides energy recovery devices to the water treatment, oil and gas, and chemical processing sectors.
Why Does ERII Give Us Pause?
- Annual revenue growth of 2.6% over the last two years was below our standards for the industrials sector
- Forecasted revenue decline of 11.4% for the upcoming 12 months implies demand will fall off a cliff
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $10.64 per share, Energy Recovery trades at 16.8x forward P/E. Check out our free in-depth research report to learn more about why ERII doesn’t pass our bar.
City Holding (CHCO)
Market Cap: $1.69 billion
With roots dating back to 1957 and a strategic presence along the I-64 and I-81 corridors, City Holding (NASDAQGS:CHCO) operates as a financial holding company providing banking, trust, and investment services through its subsidiary City National Bank across West Virginia, Kentucky, Virginia, and Ohio.
Why Are We Wary of CHCO?
- Annual net interest income growth of 8.9% over the last five years was below our standards for the banking sector
- Estimated net interest income growth of 3.5% for the next 12 months implies demand will slow from its five-year trend
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 5.6% annually
City Holding is trading at $117.73 per share, or 1.9x forward P/B. Read our free research report to see why you should think twice about including CHCO in your portfolio.
Garrett Motion (GTX)
Market Cap: $3.44 billion
A key player in the transition to cleaner vehicles, Garrett Motion (NYSE: GTX) designs and manufactures turbochargers, air compressors, and electric motor technologies for vehicle manufacturers and industrial applications.
Why Does GTX Worry Us?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4% annually over the last two years
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.3%
- High input costs result in an inferior gross margin of 19.8% that must be offset through higher volumes
Garrett Motion’s stock price of $18.50 implies a valuation ratio of 9.9x forward P/E. Dive into our free research report to see why there are better opportunities than GTX.
High-Quality Stocks for All Market Conditions
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