Investors looking for hidden gems should keep an eye on small-cap stocks because they’re frequently overlooked by Wall Street. Many opportunities exist in this part of the market, but it is also a high-risk, high-reward environment due to the lack of reliable analyst price targets.
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.
OneWater (ONEW)
Market Cap: $200.4 million
A public company since early 2020, OneWater Marine (NASDAQ: ONEW) sells boats, yachts, and other marine products.
Why Is ONEW Risky?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Sales over the last three years were less profitable as its earnings per share fell by 62.5% annually while its revenue was flat
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
OneWater is trading at $12.06 per share, or 21.6x forward P/E. Dive into our free research report to see why there are better opportunities than ONEW.
Quanex (NX)
Market Cap: $921 million
Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.
Why Does NX Give Us Pause?
- Efficiency has decreased over the last five years as its operating margin fell by 17.6 percentage points
- Revenue growth over the past two years was nullified by the company’s new share issuances as its earnings per share fell by 12.6% annually
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $20.25 per share, Quanex trades at 10.2x forward P/E. To fully understand why you should be careful with NX, check out our full research report (it’s free).
Progyny (PGNY)
Market Cap: $1.84 billion
Pioneering a data-driven approach to family building that has achieved an industry-leading patient satisfaction score of +80, Progyny (NASDAQ: PGNY) provides comprehensive fertility and family building benefits solutions to employers, helping employees access quality fertility treatments and support services.
Why Does PGNY Worry Us?
- Weak unit sales over the past two years imply it may need to invest in improvements to get back on track
- Smaller revenue base of $1.29 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
Progyny’s stock price of $23.63 implies a valuation ratio of 9.4x forward P/E. If you’re considering PGNY for your portfolio, see our FREE research report to learn more.
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