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.
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.
Stitch Fix (SFIX)
Market Cap: $449.2 million
One of the original subscription box companies, Stitch Fix (NASDAQ: SFIX) is an online personal styling and fashion service that curates personalized clothing selections for customers.
Why Should You Dump SFIX?
- Number of active clients has disappointed over the past two years, indicating weak demand for its offerings
- Suboptimal cost structure is highlighted by its history of operating margin losses
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.6% for the last two years
Stitch Fix’s stock price of $3.29 implies a valuation ratio of 0.3x forward price-to-sales. If you’re considering SFIX for your portfolio, see our FREE research report to learn more.
Benchmark (BHE)
Market Cap: $2.12 billion
Operating as a critical behind-the-scenes partner for complex technology products since 1979, Benchmark Electronics (NYSE: BHE) provides advanced manufacturing, engineering, and technology solutions for original equipment manufacturers across aerospace, medical, industrial, and technology sectors.
Why Do We Think Twice About BHE?
- Sales tumbled by 3.2% annually over the last two years, showing market trends are working against its favor during this cycle
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- ROIC of 7.2% reflects management’s challenges in identifying attractive investment opportunities
At $59.50 per share, Benchmark trades at 22.4x forward P/E. To fully understand why you should be careful with BHE, check out our full research report (it’s free).
Knowles (KN)
Market Cap: $2.25 billion
With roots dating back to 1946 and a focus on components that must perform flawlessly in critical situations, Knowles (NYSE: KN) designs and manufactures specialized electronic components like high-performance capacitors, microphones, and speakers for medical technology, defense, and industrial applications.
Why Do We Avoid KN?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.9% annually over the last five years
- Subscale operations are evident in its revenue base of $593.2 million, meaning it has fewer distribution channels than its larger rivals
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Knowles is trading at $26.30 per share, or 20.4x forward P/E. Dive into our free research report to see why there are better opportunities than KN.
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