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. That said, here are three small-cap stocks to pass on and some alternatives you should look into instead.
MSC Industrial (MSM)
Market Cap: $7.01 billion
Founded in NYC’s Little Italy, MSC Industrial Direct (NYSE: MSM) provides industrial supplies and equipment, offering vast and reliable selection for customers such as contractors
Why Do We Steer Clear of MSM?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- Earnings per share have dipped by 1.4% annually over the past five years, which is concerning because stock prices follow EPS over the long term
- Eroding returns on capital suggest its historical profit centers are aging
MSC Industrial is trading at $125.59 per share, or 24x forward P/E. Read our free research report to see why you should think twice about including MSM in your portfolio.
Pitney Bowes (PBI)
Market Cap: $2.51 billion
With a century-long history dating back to 1920 and processing over 15 billion pieces of mail annually, Pitney Bowes (NYSE: PBI) provides shipping, mailing technology, logistics, and financial services to businesses of all sizes.
Why Are We Hesitant About PBI?
- Annual sales declines of 13% for the past five years show its products and services struggled to connect with the market during this cycle
- Sales are projected to tank by 1.7% over the next 12 months as its demand continues evaporating
At $18.17 per share, Pitney Bowes trades at 10.8x forward P/E. To fully understand why you should be careful with PBI, check out our full research report (it’s free).
S&T Bancorp (STBA)
Market Cap: $1.85 billion
Tracing its roots back to 1902 in western Pennsylvania's industrial heartland, S&T Bancorp (NASDAQ: STBA) is a Pennsylvania-based bank holding company that provides retail and commercial banking services, cash management, trust services, and investment advisory solutions.
Why Do We Pass on STBA?
- Net interest income trends were unexciting over the last five years as its 5.2% annual growth was below the typical banking firm
- Projected net interest income growth of 4.1% for the next 12 months suggests sluggish demand
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 3.2% annually
S&T Bancorp’s stock price of $52.59 implies a valuation ratio of 1.3x forward P/B. If you’re considering STBA for your portfolio, see our FREE research report to learn more.
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