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.
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.
Selective Insurance Group (SIGI)
Market Cap: $5.68 billion
Founded in 1926 during the early days of automobile insurance, Selective Insurance Group (NASDAQ: SIGI) is a property and casualty insurance company that sells commercial, personal, and excess and surplus lines insurance products through independent agents.
Why Are We Wary of SIGI?
- Forecasted revenue decline of 1.2% for the upcoming 12 months implies demand will fall off a cliff
- Efficiency has decreased over the last five years as its pre-tax profit margin fell by 5.1 percentage points
- Performance over the past five years shows its incremental sales were less profitable, as its 4.3% annual earnings per share growth trailed its revenue gains
At $95.48 per share, Selective Insurance Group trades at 1.5x forward P/B. Read our free research report to see why you should think twice about including SIGI in your portfolio.
PROG (PRG)
Market Cap: $1.82 billion
Evolving from its origins as Aaron's, Inc. before rebranding in 2020, PROG Holdings (NYSE: PRG) provides alternative payment solutions including lease-to-own options and second-look credit products for consumers who may not qualify for traditional financing.
Why Should You Sell PRG?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 4.3% annually
- Tangible book value per share tumbled by 35% annually over the last five years, showing financials sector trends are working against it during this cycle
PROG is trading at $45.84 per share, or 8.6x forward P/E. Dive into our free research report to see why there are better opportunities than PRG.
Hercules Capital (HTGC)
Market Cap: $3.10 billion
Named after the mythological hero known for his strength, Hercules Capital (NYSE: HTGC) is a business development company that provides debt financing to venture capital-backed and growth-stage technology and life sciences companies.
Why Does HTGC Fall Short?
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 3.4% annually
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Hercules Capital’s stock price of $16.90 implies a valuation ratio of 8.5x forward P/E. To fully understand why you should be careful with HTGC, check out our full research report (it’s free).
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