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.
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 avoid and some other investments you should consider instead.
Macy's (M)
Market Cap: $6.16 billion
With a storied history that began with its 1858 founding, Macy’s (NYSE: M) is a department store chain that sells clothing, cosmetics, accessories, and home goods.
Why Do We Pass on M?
- Store closures and disappointing same-store sales suggest demand is sluggish and it’s rightsizing its operations
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Earnings per share have contracted by 22.4% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Macy’s stock price of $23.19 implies a valuation ratio of 11x forward P/E. To fully understand why you should be careful with M, check out our full research report (it’s free).
BellRing Brands (BRBR)
Market Cap: $2.94 billion
Spun out of Post Holdings in 2019, Bellring Brands (NYSE: BRBR) offers protein shakes, nutrition bars, and other products under the PowerBar, Premier Protein, and Dymatize brands.
Why Are We Cautious About BRBR?
- Modest revenue base of $2.32 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Estimated sales growth of 4.7% for the next 12 months implies demand will slow from its three-year trend
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 4 percentage points
BellRing Brands is trading at $24.83 per share, or 12.9x forward P/E. Dive into our free research report to see why there are better opportunities than BRBR.
AutoNation (AN)
Market Cap: $7.89 billion
With a vast network of over 300 locations strategically concentrated in America's Sunbelt region, AutoNation (NYSE: AN) operates one of America's largest networks of automotive dealerships, selling new and used vehicles, parts, and services across multiple brands.
Why Do We Steer Clear of AN?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 17.9%
- Incremental sales over the last three years were much less profitable as its earnings per share fell by 5.7% annually while its revenue grew
At $216.27 per share, AutoNation trades at 10.6x forward P/E. Read our free research report to see why you should think twice about including AN in your portfolio.
High-Quality Stocks for All Market Conditions
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