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. Keeping that in mind, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.
Grocery Outlet (GO)
Market Cap: $676.3 million
Due to its differentiated procurement and buying approach, Grocery Outlet (NASDAQ: GO) is a discount grocery store chain that offers substantial discounts on name-brand products.
Why Should You Dump GO?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Efficiency has decreased over the last year as its operating margin fell by 6.5 percentage points
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $6.88 per share, Grocery Outlet trades at 14.1x forward P/E. To fully understand why you should be careful with GO, check out our full research report (it’s free).
Perma-Fix (PESI)
Market Cap: $208.1 million
Tackling hazardous waste challenges since 1990, Perma-Fix (NASDAQ: PESI) provides environmental waste treatment services.
Why Do We Steer Clear of PESI?
- Sales tumbled by 10.2% annually over the last five years, showing market trends are working against its favor during this cycle
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Perma-Fix’s stock price of $11.22 implies a valuation ratio of 2.4x forward price-to-sales. Read our free research report to see why you should think twice about including PESI in your portfolio.
Enphase (ENPH)
Market Cap: $5.02 billion
The first company to successfully commercialize the solar micro-inverter, Enphase (NASDAQ: ENPH) manufactures software-driven home energy products.
Why Do We Avoid ENPH?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 19.8% annually over the last two years
- Free cash flow margin dropped by 15.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Eroding returns on capital suggest its historical profit centers are aging
Enphase is trading at $38.45 per share, or 17.6x forward P/E. Check out our free in-depth research report to learn more about why ENPH doesn’t pass our bar.
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