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.
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. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.
Opendoor (OPEN)
Market Cap: $5.05 billion
Founded by real estate guru Eric Wu, Opendoor (NASDAQ: OPEN) offers a technology-driven, convenient, and streamlined process to buy and sell homes.
Why Is OPEN Risky?
- Performance surrounding its homes sold has lagged its peers
- Free cash flow margin is forecasted to shrink by 27.5 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
Opendoor is trading at $5.24 per share, or 1x forward price-to-sales. To fully understand why you should be careful with OPEN, check out our full research report (it’s free).
Trinity (TRN)
Market Cap: $2.59 billion
Operating under the trade name TrinityRail, Trinity (NYSE: TRN) is a provider of railcar products and services in North America.
Why Does TRN Give Us Pause?
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 27.8% declines over the past two years
- Estimated sales for the next 12 months are flat and imply a softer demand environment
- Free cash flow margin shrank by 22.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Trinity’s stock price of $32.48 implies a valuation ratio of 1.3x trailing 12-month price-to-sales. Dive into our free research report to see why there are better opportunities than TRN.
PAR Technology (PAR)
Market Cap: $584.3 million
Originally founded in 1968 as a defense contractor for the U.S. government, PAR Technology (NYSE: PAR) provides cloud-based software, payment processing, and hardware solutions that help restaurants manage everything from point-of-sale to customer loyalty programs.
Why Is PAR Not Exciting?
- Negative free cash flow raises questions about the return timeline for its investments
- Negative returns on capital show management lost money while trying to expand the business
At $13.65 per share, PAR Technology trades at 26.7x forward P/E. Check out our free in-depth research report to learn more about why PAR doesn’t pass our bar.
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