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.
Utz (UTZ)
Market Cap: $687.9 million
Tracing its roots back to 1921 when Bill and Salie Utz began making potato chips in their kitchen, Utz Brands (NYSE: UTZ) offers salty snacks such as potato chips, tortilla chips, pretzels, cheese snacks, and ready-to-eat popcorn, among others.
Why Is UTZ Risky?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Revenue base of $1.45 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $7.78 per share, Utz trades at 9.8x forward P/E. Dive into our free research report to see why there are better opportunities than UTZ.
Smith & Wesson (SWBI)
Market Cap: $688.3 million
With a history dating back to 1852, Smith & Wesson (NASDAQ: SWBI) is a firearms manufacturer known for its handguns and rifles.
Why Should You Dump SWBI?
- Products and services aren't resonating with the market as its revenue declined by 12.2% annually over the last five years
- Poor free cash flow margin of 3.1% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Smith & Wesson is trading at $15.31 per share, or 47.8x forward P/E. Check out our free in-depth research report to learn more about why SWBI doesn’t pass our bar.
PennyMac Financial Services (PFSI)
Market Cap: $4.46 billion
Founded during the 2008 financial crisis to help address the mortgage market meltdown, PennyMac Financial Services (NYSE: PFSI) is a specialty financial services company that originates, services, and manages investments related to residential mortgage loans in the United States.
Why Do We Think Twice About PFSI?
- Sales tumbled by 12.1% annually over the last five years, showing market trends are working against its favor during this cycle
- Net interest income trends were unexciting over the last five years as its 4% annual growth was below the typical banking firm
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
PennyMac Financial Services’s stock price of $85.90 implies a valuation ratio of 1x forward P/B. If you’re considering PFSI for your portfolio, see our FREE research report to learn more.
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