Investors looking for hidden gems should keep an eye on small-cap stocks because they’re frequently overlooked by Wall Street. Many opportunities exist in this part of the market, but it is also a high-risk, high-reward environment due to the lack of reliable analyst price targets.
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 is one small-cap stock that could be the next big thing and two that may have trouble.
Two Small-Cap Stocks to Sell:
Target Hospitality (TH)
Market Cap: $1.44 billion
Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ: TH) is a provider of specialty workforce lodging accommodations and services.
Why Do We Steer Clear of TH?
- Lackluster 7.3% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 3.7% annually
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Target Hospitality is trading at $14.35 per share, or 19x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including TH in your portfolio.
Forestar Group (FOR)
Market Cap: $1.31 billion
As a majority-owned subsidiary of homebuilding giant D.R. Horton, Forestar Group (NYSE: FOR) develops and sells finished residential lots to homebuilders, focusing primarily on land acquisition and development for single-family homes.
Why Do We Pass on FOR?
- 11.2% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Forestar Group’s stock price of $25.78 implies a valuation ratio of 8.3x forward P/E. Check out our free in-depth research report to learn more about why FOR doesn’t pass our bar.
One Small-Cap Stock to Watch:
California Resources (CRC)
Market Cap: $5.89 billion
Operating some of California's most productive oil fields including Elk Hills and Belridge, California Resources (NYSE: CRC) explores for and produces crude oil, natural gas, and natural gas liquids from fields across California.
Why Does CRC Stand Out?
- Annual revenue growth of 16.9% over the past five years was outstanding, reflecting market share gains this cycle
- Superiority of its unit economics results in a top-tier gross margin of 57.1%
- Robust free cash flow margin of 14.3% gives it many options for capital deployment
At $67.79 per share, California Resources trades at 16.6x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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