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. That said, here are three small-cap stocks to swipe left on and some alternatives you should look into instead.
Generac (GNRC)
Market Cap: $9.73 billion
With its name deriving from a combination of “generating” and “AC”, Generac (NYSE: GNRC) offers generators and other power products for residential, industrial, and commercial use.
Why Does GNRC Give Us Pause?
- Muted 4.7% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Free cash flow margin dropped by 6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Eroding returns on capital suggest its historical profit centers are aging
Generac’s stock price of $165.79 implies a valuation ratio of 20.4x forward P/E. Read our free research report to see why you should think twice about including GNRC in your portfolio.
Simmons First National (SFNC)
Market Cap: $2.80 billion
With roots dating back to 1903 and a presence across Arkansas, Kansas, Missouri, Oklahoma, Tennessee, and Texas, Simmons First National (NASDAQ: SFNC) is a regional bank holding company that provides banking and financial services to individuals and businesses.
Why Should You Dump SFNC?
- Annual sales declines of 4.9% for the past two years show its products and services struggled to connect with the market during this cycle
- Flat net interest income over the last five years suggest it must find different ways to grow during this cycle
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 11.8% annually, worse than its revenue
At $19.36 per share, Simmons First National trades at 0.7x forward P/B. To fully understand why you should be careful with SFNC, check out our full research report (it’s free).
Encore Capital Group (ECPG)
Market Cap: $1.00 billion
Operating in the often misunderstood world of debt collection since 1999, Encore Capital Group (NASDAQ: ECPG) purchases portfolios of defaulted consumer debt at deep discounts and works with individuals to recover these obligations while helping them toward financial recovery.
Why Do We Think Twice About ECPG?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Sales over the last five years were less profitable as its earnings per share fell by 27.6% annually while its revenue was flat
- High net-debt-to-EBITDA ratio of 13× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Encore Capital Group is trading at $43.50 per share, or 7x forward P/E. If you’re considering ECPG for your portfolio, see our FREE research report to learn more.
High-Quality Stocks for All Market Conditions
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