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.
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. That said, here are three small-cap stocks to pass on and some alternatives you should look into instead.
Genesco (GCO)
Market Cap: $382.5 million
Spanning a broad range of styles, brands, and prices, Genesco (NYSE: GCO) sells footwear, apparel, and accessories through multiple brands and banners.
Why Do We Pass on GCO?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Genesco is trading at $34.51 per share, or 10.8x forward P/E. Read our free research report to see why you should think twice about including GCO in your portfolio.
America's Car-Mart (CRMT)
Market Cap: $18.4 million
With a strong presence in the Southern and Central US, America’s Car-Mart (NASDAQ: CRMT) sells used cars to budget-conscious consumers.
Why Do We Avoid CRMT?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Issuance of new shares over the last three years caused its earnings per share to fall by 41.5% annually, even worse than its revenue declines
- Unprofitable operations could lead to additional rounds of dilutive equity financing if the credit window closes
America's Car-Mart’s stock price of $2.21 implies a valuation ratio of 27x forward EV-to-EBITDA. To fully understand why you should be careful with CRMT, check out our full research report (it’s free).
Malibu Boats (MBUU)
Market Cap: $525 million
Founded in California in 1982, Malibu Boats (NASDAQ: MBUU) is a manufacturer of high-performance sports boats and luxury watercrafts.
Why Should You Sell MBUU?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Free cash flow margin is expected to remain in place over the coming year
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $26.68 per share, Malibu Boats trades at 10.9x forward P/E. Dive into our free research report to see why there are better opportunities than MBUU.
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