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.
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 swipe left on and some alternatives you should look into instead.
Alamo (ALG)
Market Cap: $1.88 billion
Expanding its markets through acquisitions since its founding, Alamo (NYSE: ALG) designs, manufactures, and services vegetation management and infrastructure maintenance equipment for governmental, industrial, and agricultural use.
Why Do We Think Twice About ALG?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.2% annually over the last two years
- Anticipated sales growth of 4.5% for the next year implies demand will be shaky
- Earnings per share have contracted by 9.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
At $161.35 per share, Alamo trades at 15x forward P/E. Check out our free in-depth research report to learn more about why ALG doesn’t pass our bar.
Insteel (IIIN)
Market Cap: $561.6 million
Growing from a small wire manufacturer to one of the largest in the U.S., Insteel (NYSE: IIIN) provides steel wire reinforcing products for concrete.
Why Are We Hesitant About IIIN?
- Sales trends were unexciting over the last five years as its 5.9% annual growth was below the typical industrials company
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
Insteel’s stock price of $29.09 implies a valuation ratio of 16.7x forward P/E. Dive into our free research report to see why there are better opportunities than IIIN.
Green Plains (GPRE)
Market Cap: $1.04 billion
Operating one of North America's largest ethanol platforms with capacity to process 310 million bushels of corn annually, Green Plains (NASDAQ: GPRE) operates ten biorefineries that convert corn into ethanol for fuel, distillers grains for animal feed, and renewable corn oil.
Why Do We Steer Clear of GPRE?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Gross margin of 5.5% is below its competitors, leaving less money to invest in exploration and production
- Cash burn makes us question whether it can achieve sustainable long-term growth
Green Plains is trading at $14.91 per share, or 8.7x forward P/E. If you’re considering GPRE for your portfolio, see our FREE research report to learn more.
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