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 swipe left on and some alternatives you should look into instead.
Soho House (SHCO)
Market Cap: $1.73 billion
Boasting fancy locations in hubs such as NYC and Miami, Soho House (NYSE: SHCO) is a global hospitality brand offering exclusive private member clubs, hotels, and restaurants.
Why Are We Hesitant About SHCO?
- Number of members has disappointed over the past two years, indicating weak demand for its offerings
- Cash burn makes us question whether it can achieve sustainable long-term growth
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $8.84 per share, Soho House trades at 9.7x forward EV-to-EBITDA. If you’re considering SHCO for your portfolio, see our FREE research report to learn more.
Funko (FNKO)
Market Cap: $286 million
Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ: FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.
Why Do We Avoid FNKO?
- Products and services aren't resonating with the market as its revenue declined by 9.7% annually over the last two years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Funko’s stock price of $4.11 implies a valuation ratio of 20.4x forward P/E. Dive into our free research report to see why there are better opportunities than FNKO.
AMN Healthcare Services (AMN)
Market Cap: $702.9 million
With a network of thousands of healthcare professionals ranging from nurses to physicians to executives, AMN Healthcare (NYSE: AMN) provides healthcare workforce solutions including temporary staffing, permanent placement, and technology platforms for hospitals and healthcare facilities across the United States.
Why Are We Out on AMN?
- Declining travelers on assignment over the past two years indicate demand is soft and that the company may need to revise its strategy
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 8.4% annually while its revenue grew
- Waning returns on capital imply its previous profit engines are losing steam
AMN Healthcare Services is trading at $18.34 per share, or 17.7x forward P/E. To fully understand why you should be careful with AMN, check out our full research report (it’s free).
Stocks We Like More
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