3 Small-Cap Stocks We Steer Clear Of
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.
The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. Keeping that in mind, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.
PENN Entertainment (PENN)
Market Cap: $2.70 billion
Established in 1982, PENN Entertainment (NASDAQ:PENN) is a diversified American operator of casinos, sports betting, and entertainment venues.
Why Do We Pass on PENN?
- Annual revenue growth of 13.6% over the last five years was below our standards for the consumer discretionary sector
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.9% for the last two years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
PENN Entertainment’s stock price of $20.69 implies a valuation ratio of 22.7x forward P/E. Read our free research report to see why you should think twice about including PENN in your portfolio.
NN (NNBR)
Market Cap: $157.3 million
Formerly known as Nuturn, NN (NASDAQ:NNBR) provides metal components, bearings, and plastic and rubber components to the automotive, aerospace, medical, and industrial sectors.
Why Do We Steer Clear of NNBR?
- Sales stagnated over the last five years and signal the need for new growth strategies
- 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
NN is trading at $2.67 per share, or 29.4x forward P/E. Check out our free in-depth research report to learn more about why NNBR doesn’t pass our bar.
Comstock Resources (CRK)
Market Cap: $3.87 billion
Operating in the Haynesville shale where a single well can produce millions of cubic feet of gas daily, Comstock Resources (NYSE:CRK) drills for and produces natural gas from underground shale rock formations in Louisiana and Texas.
Why Should You Sell CRK?
- Annual revenue growth of 5.7% over the last five years was below our standards for the energy upstream and integrated energy sector
- Expenses have increased as a percentage of revenue over the last five years as its EBITDA margin fell by 6.1 percentage points
- Cash-burning history makes us doubt the long-term viability of its business model
At $13.30 per share, Comstock Resources trades at 18.1x forward P/E. To fully understand why you should be careful with CRK, check out our full research report (it’s free).
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