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. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Bright Horizons (BFAM)
Market Cap: $3.57 billion
Founded in 1986, Bright Horizons (NYSE: BFAM) is a global provider of child care, early education, and workforce support solutions.
Why Is BFAM Risky?
- 14.4% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Free cash flow margin is projected to show no improvement next year
- Returns on capital are increasing as management makes relatively better investment decisions
Bright Horizons’s stock price of $73.37 implies a valuation ratio of 13.7x forward P/E. To fully understand why you should be careful with BFAM, check out our full research report (it’s free).
Wabash (WNC)
Market Cap: $526.7 million
With its first trailer reportedly built on two sawhorses, Wabash (NYSE: WNC) offers semi trailers, liquid transportation containers, truck bodies, and equipment for moving goods.
Why Do We Steer Clear of WNC?
- Demand cratered as it couldn’t win new orders over the past two years, leading to an average 24.9% decline in its backlog
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $12.94 per share, Wabash trades at 20.2x forward EV-to-EBITDA. If you’re considering WNC for your portfolio, see our FREE research report to learn more.
BankUnited (BKU)
Market Cap: $3.36 billion
Born from the ashes of a failed Florida thrift during the 2009 financial crisis, BankUnited (NYSE: BKU) is a regional bank that provides commercial lending, deposit services, and treasury solutions to businesses and consumers primarily in Florida and the New York metropolitan area.
Why Does BKU Give Us Pause?
- 5.5% annual net interest income growth over the last five years was slower than its banking peers
- Inferior net interest margin of 2.9% means it must compensate for lower profitability through increased loan originations
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
BankUnited is trading at $46.46 per share, or 1.1x forward P/B. Dive into our free research report to see why there are better opportunities than BKU.
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