Many small-cap stocks have limited Wall Street coverage, giving savvy investors the chance to act before everyone else catches on. But the flip side is that these businesses have increased downside risk because they lack the scale and staying power of their larger competitors.
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.
WillScot Mobile Mini (WSC)
Market Cap: $4.08 billion
Originally focusing on mobile offices for construction sites, WillScot (NASDAQ: WSC) provides ready-to-use temporary spaces, largely for longer-term lease.
Why Do We Pass on WSC?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.4% annually over the last two years
- Earnings per share were flat over the last five years and fell short of the peer group average
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
WillScot Mobile Mini is trading at $22.53 per share, or 18.5x forward P/E. Check out our free in-depth research report to learn more about why WSC doesn’t pass our bar.
American Airlines (AAL)
Market Cap: $9.02 billion
One of the ‘Big Four’ airlines in the US, American Airlines (NASDAQ: AAL) is a major global air carrier that serves both business and leisure travelers through its domestic and international flights.
Why Are We Bearish on AAL?
- Demand for its offerings was relatively low as its number of revenue passenger miles has underwhelmed
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $13.63 per share, American Airlines trades at 10.5x forward P/E. Read our free research report to see why you should think twice about including AAL in your portfolio.
Xerox (XRX)
Market Cap: $374.2 million
Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ: XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.
Why Do We Avoid XRX?
- Annual revenue growth of 1.5% over the last five years was below our standards for the business services sector
- Earnings per share fell by 50.9% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Xerox’s stock price of $2.86 implies a valuation ratio of 9.3x forward P/E. If you’re considering XRX for your portfolio, see our FREE research report to learn more.
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