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.
The downside that can come from buying these securities is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
eXp World (EXPI)
Market Cap: $1.19 billion
Founded in 2009, eXp World (NASDAQ: EXPI) is a real estate company known for its virtual, cloud-based approach to real estate brokerage.
Why Do We Steer Clear of EXPI?
- Lackluster 5.2% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 25% annually while its revenue grew
- Low free cash flow margin of 3.4% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
eXp World’s stock price of $7.48 implies a valuation ratio of 13.9x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than EXPI.
Littelfuse (LFUS)
Market Cap: $8.68 billion
The developer of the first blade-type automotive fuse, Littelfuse (NASDAQ: LFUS) provides electrical protection and control components for the automotive, industrial, electronics, and telecommunications industries.
Why Are We Cautious About LFUS?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- Earnings per share have dipped by 4.7% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Littelfuse is trading at $348.57 per share, or 27.1x forward P/E. Check out our free in-depth research report to learn more about why LFUS doesn’t pass our bar.
Ameresco (AMRC)
Market Cap: $1.74 billion
Having played a role in upgrading the energy solutions of Alcatraz Island, Ameresco (NYSE: AMRC) provides energy and renewable energy solutions for various sectors.
Why Is AMRC Not Exciting?
- Gross margin of 16.5% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Cash-burning history makes us doubt the long-term viability of its business model
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $32.90 per share, Ameresco trades at 33.7x forward P/E. To fully understand why you should be careful with AMRC, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
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