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.
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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
American Eagle (AEO)
Market Cap: $2.72 billion
With a heavy focus on denim, American Eagle Outfitters (NYSE: AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.
Why Are We Cautious About AEO?
- Conservative approach to adding new stores shows management is focused on improving existing location performance
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 3.9 percentage points
- Underwhelming 8.8% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its decreasing returns suggest its historical profit centers are aging
At $16.22 per share, American Eagle trades at 9.4x forward P/E. Read our free research report to see why you should think twice about including AEO in your portfolio.
Papa John's (PZZA)
Market Cap: $1.07 billion
Founded by the eclectic John “Papa John” Schnatter, Papa John’s (NASDAQ: PZZA) is a globally recognized pizza delivery and carryout chain known for “better ingredients” and “better pizza”.
Why Is PZZA Risky?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Estimated sales decline of 6.1% for the next 12 months implies a challenging demand environment
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 3.3 percentage points
Papa John's is trading at $32.88 per share, or 21.7x forward P/E. Check out our free in-depth research report to learn more about why PZZA doesn’t pass our bar.
FB Financial (FBK)
Market Cap: $2.69 billion
Founded in 1906 and operating through more than a century of economic cycles, FB Financial (NYSE: FBK) operates FirstBank, providing commercial and consumer banking services across Tennessee, Kentucky, Alabama, and North Georgia.
Why Are We Wary of FBK?
- Muted 1.9% annual revenue growth over the last five years shows its demand lagged behind its banking peers
- Estimated net interest income growth of 4.9% for the next 12 months implies demand will slow from its five-year trend
- Earnings per share lagged its peers over the last five years as they only grew by 2.4% annually
FB Financial’s stock price of $51.96 implies a valuation ratio of 1.2x forward P/B. Dive into our free research report to see why there are better opportunities than FBK.
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