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 are three small-cap stocks to avoid and some other investments you should consider instead.
VF Corp (VFC)
Market Cap: $6.85 billion
Owner of The North Face, Vans, and Supreme, VF Corp (NYSE: VFC) is a clothing conglomerate specializing in branded lifestyle apparel, footwear, and accessories.
Why Do We Pass on VFC?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
VF Corp’s stock price of $17.37 implies a valuation ratio of 14.7x forward P/E. If you’re considering VFC for your portfolio, see our FREE research report to learn more.
Peabody Energy (BTU)
Market Cap: $3.21 billion
Beginning with a single wagon hauling coal in Illinois back when Grover Cleveland was president, Peabody Energy (NYSE: BTU) mines coal used by electricity generators and steel manufacturers.
Why Do We Think BTU Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.7% annually over the last ten years
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 24.9%
- Costs have risen faster than its revenue over the last five years, causing its EBITDA margin to decline by 25.1 percentage points
Peabody Energy is trading at $26.42 per share, or 13.6x forward P/E. Check out our free in-depth research report to learn more about why BTU doesn’t pass our bar.
Northern Oil and Gas (NOG)
Market Cap: $2.15 billion
Taking the path less traveled in the oil industry by choosing not to operate its own wells, Northern Oil and Gas (NYSE: NOG) acquires minority stakes in oil and gas wells operated by other companies across major U.S. shale basins.
Why Do We Think Twice About NOG?
- Efficiency has decreased over the last five years as its EBITDA margin fell by 3.2 percentage points
- net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $20.72 per share, Northern Oil and Gas trades at 5.1x forward P/E. To fully understand why you should be careful with NOG, check out our full research report (it’s free).
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