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.
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 swipe left on and some alternatives you should look into instead.
WeightWatchers (WW)
Market Cap: $182.5 million
Known by many for its old cable television commercials, WeightWatchers (NASDAQ: WW) is a wellness company offering a range of products and services promoting weight loss and healthy habits.
Why Do We Think WW Will Underperform?
- Sluggish trends in its members suggest customers aren’t adopting its solutions as quickly as the company hoped
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
WeightWatchers is trading at $18.53 per share, or 4.5x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than WW.
MSC Industrial (MSM)
Market Cap: $4.91 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?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.5% annually over the last two years
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 3.3% annually while its revenue grew
- Waning returns on capital imply its previous profit engines are losing steam
At $87.84 per share, MSC Industrial trades at 20.6x forward P/E. Read our free research report to see why you should think twice about including MSM in your portfolio.
Home Bancshares (HOMB)
Market Cap: $5.12 billion
Founded in Conway, Arkansas in 1998 and growing through strategic acquisitions across the Southeast, Home Bancshares (NYSE: HOMB) operates as the bank holding company for Centennial Bank, providing commercial and retail banking services to businesses and individuals across multiple states.
Why Does HOMB Worry Us?
- Muted 4.4% annual revenue growth over the last two years shows its demand lagged behind its banking peers
- Net interest income is projected to remain flat over the next 12 months as demand decelerates from its five-year trend
- Incremental sales over the last five years were less profitable as its 6.2% annual earnings per share growth lagged its revenue gains
Home Bancshares’s stock price of $26.02 implies a valuation ratio of 1.1x forward P/B. If you’re considering HOMB for your portfolio, see our FREE research report to learn more.
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