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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Levi's (LEVI)
Market Cap: $9.06 billion
Credited for inventing the first pair of blue jeans in 1873, Levi's (NYSE: LEVI) is an apparel company renowned for its iconic denim products and classic American style.
Why Do We Avoid LEVI?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.6%
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Levi's is trading at $22.90 per share, or 18x forward P/E. Check out our free in-depth research report to learn more about why LEVI doesn’t pass our bar.
Ryder (R)
Market Cap: $7.55 billion
As one of the first companies to introduce the idea of leasing trucks, Ryder (NYSE: R) provides rental vehicles to businesses and delivers packages directly to homes or businesses.
Why Is R Risky?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 3% for the last two years
- Earnings per share have dipped by 7.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- 9.5 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Ryder’s stock price of $185.25 implies a valuation ratio of 13.1x forward P/E. To fully understand why you should be careful with R, check out our full research report (it’s free).
Nelnet (NNI)
Market Cap: $4.62 billion
Starting as a student loan servicer in the 1970s and evolving through the changing landscape of education finance, Nelnet (NYSE: NNI) provides student loan servicing, education technology, payment processing, and banking services while managing a portfolio of education loans.
Why Does NNI Worry Us?
- Earnings per share were flat over the last two years while its revenue grew, showing its incremental sales were less profitable
At $127.58 per share, Nelnet trades at 16.1x forward P/E. If you’re considering NNI for your portfolio, see our FREE research report to learn more.
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