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.
These trade-offs can cause headaches for even the most seasoned professionals, which is why we started StockStory - to help you separate the good companies from the bad. That said, here are three small-cap stocks to pass on and some alternatives you should look into instead.
NN (NNBR)
Market Cap: $317.1 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 Are We Out on NNBR?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.1% annually over the last five years
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $3.89 per share, NN trades at 6.2x forward EV-to-EBITDA. If you’re considering NNBR for your portfolio, see our FREE research report to learn more.
Fastly (FSLY)
Market Cap: $4.24 billion
Taking its name from the core advantage it delivers to customers, Fastly (NASDAQ: FSLY) operates an edge cloud platform that processes, secures, and delivers web content as close to end users as possible, enabling faster digital experiences.
Why Does FSLY Fall Short?
- Annual revenue growth of 13.7% over the last two years was below our standards for the software sector
- Gross margin of 61.5% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Suboptimal cost structure is highlighted by its history of operating margin losses
Fastly’s stock price of $26.24 implies a valuation ratio of 5.8x forward price-to-sales. To fully understand why you should be careful with FSLY, check out our full research report (it’s free).
Commerce Bancshares (CBSH)
Market Cap: $8.54 billion
Founded in 1865 during the post-Civil War economic boom, Commerce Bancshares (NASDAQGS:CBSH) is a Midwest-focused bank holding company that provides retail, commercial, and wealth management services to individuals and businesses.
Why Are We Wary of CBSH?
- Annual revenue growth of 6.2% over the last five years was below our standards for the banking sector
- Annual net interest income growth of 7% over the last five years was below our standards for the banking sector
- Annual earnings per share growth of 4.3% underperformed its revenue over the last five years, showing its incremental sales were less profitable
Commerce Bancshares is trading at $58.01 per share, or 1.9x forward P/B. Check out our free in-depth research report to learn more about why CBSH doesn’t pass our bar.
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