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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Chegg (CHGG)
Market Cap: $94.62 million
Started as a physical textbook rental service, Chegg (NYSE: CHGG) is now a digital platform addressing student pain points by providing study and academic assistance.
Why Are We Out on CHGG?
- Struggled with new customer acquisition as its services subscribers averaged 23.3% declines
- EBITDA margin declined by 12.9 percentage points over the last few years as its sales cratered
- Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable
At $0.86 per share, Chegg trades at 2.8x forward EV/EBITDA. Read our free research report to see why you should think twice about including CHGG in your portfolio.
ChargePoint (CHPT)
Market Cap: $157.2 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 Does CHPT Fall Short?
- Sales tumbled by 7.3% annually over the last two years, showing market trends are working against it during this cycle
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
ChargePoint’s stock price of $6.00 implies a valuation ratio of 0.3x forward price-to-sales. Check out our free in-depth research report to learn more about why CHPT doesn’t pass our bar.
Progyny (PGNY)
Market Cap: $2.51 billion
Pioneering a data-driven approach to family building that has achieved an industry-leading patient satisfaction score of +80, Progyny (NASDAQ: PGNY) provides comprehensive fertility and family building benefits solutions to employers, helping employees access quality fertility treatments and support services.
Why Are We Cautious About PGNY?
- Underwhelming unit sales over the past two years imply it may need to invest in improvements to get back on track
- Smaller revenue base of $1.29 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Adjusted operating margin was unchanged over the last two years, suggesting it failed to gain leverage on its fixed costs
Progyny is trading at $31.92 per share, or 14.7x forward P/E. Read our free research report to see why you should think twice about including PGNY in your portfolio.
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