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. Keeping that in mind, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.
Icahn Enterprises (IEP)
Market Cap: $4.98 billion
Founded in 1987, Icahn Enterprises (NASDAQ: IEP) is a diversified holding company primarily engaged in investment and asset management across various sectors.
Why Does IEP Worry Us?
- Annual sales declines of 7.1% for the past two years show its products and services struggled to connect with the market during this cycle
- Gross margin of 10.5% reflects its high production costs
- Free cash flow margin dropped by 7.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Icahn Enterprises is trading at $7.82 per share, or 0.5x forward price-to-sales. If you’re considering IEP for your portfolio, see our FREE research report to learn more.
Merit Medical Systems (MMSI)
Market Cap: $4.18 billion
Founded in 1987 and now offering over 1,700 patented products across global markets, Merit Medical Systems (NASDAQ: MMSI) manufactures and markets specialized medical devices used in minimally invasive procedures for cardiology, radiology, oncology, critical care, and endoscopy.
Why Are We Cautious About MMSI?
- Modest revenue base of $1.52 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $70.11 per share, Merit Medical Systems trades at 17.5x forward P/E. To fully understand why you should be careful with MMSI, check out our full research report (it’s free).
SAIC (SAIC)
Market Cap: $4.13 billion
With over five decades of experience supporting national security missions, Science Applications International Corporation (NASDAQ: SAIC) provides technical, engineering, and enterprise IT services primarily to U.S. government agencies and military branches.
Why Should You Dump SAIC?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.2% annually over the last two years
- Projected sales decline of 1.9% over the next 12 months indicates demand will continue deteriorating
SAIC’s stock price of $95.32 implies a valuation ratio of 10x forward P/E. Dive into our free research report to see why there are better opportunities than SAIC.
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