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.
Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. That said, here are three small-cap stocks to avoid and some other investments you should consider instead.
Sinclair (SBGI)
Market Cap: $926.4 million
With over 2,400 hours of local news produced weekly and 640 broadcast channels reaching millions of American homes, Sinclair (NASDAQ: SBGI) operates a network of 185 local television stations across 86 U.S. markets, producing news programming and distributing content from major networks.
Why Do We Avoid SBGI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 12% annually over the last five years
- Diminishing returns on capital suggest its earlier profit pools are drying up
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Sinclair’s stock price of $12.85 implies a valuation ratio of 6.7x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SBGI in your portfolio.
Champion Homes (SKY)
Market Cap: $4.71 billion
Founded in 1951, Champion Homes (NYSE: SKY) is a manufacturer of modular homes and buildings in North America.
Why Does SKY Give Us Pause?
- Disappointing unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 9.1 percentage points
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Champion Homes is trading at $86.83 per share, or 23.7x forward P/E. Dive into our free research report to see why there are better opportunities than SKY.
ProFrac (ACDC)
Market Cap: $817.7 million
Operating one of the largest electric-powered fracturing fleets in North America, ProFrac (NASDAQ: ACDC) provides hydraulic fracturing services that help oil and gas companies extract hydrocarbons from underground shale formations.
Why Are We Bearish on ACDC?
- Gross margin of 32.1% is below its competitors, leaving less money to invest in exploration and production
- Day-to-day expenses have swelled relative to revenue over the last five years as its EBITDA margin fell by 14.9 percentage points
- Poor free cash flow margin of 3.7% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $4.48 per share, ProFrac trades at 6.3x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why ACDC doesn’t pass our bar.
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